Earnings Call Transcript - CMT Q3 2024

Operator, Operator

Good morning, everyone. Welcome to the Core Molding Technologies Third Quarter Fiscal 2024 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. As a reminder, this conference call is being recorded. I will now turn the call over to Sandy Martin, Three Part Advisors. Please go ahead.

Sandy Martin, Three Part Advisors

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Core Molding Technologies conference call to review third quarter results for 2024. Joining me on the call today are the company's President and CEO, Dave Duvall; and EVP and CFO, John Zimmer. This call is being webcast and can be accessed through coremt.com via an audio link on the Investor Relations’ Events and Presentations page. Today's conference call, including the Q&A session, will be recorded. 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. By their nature, forward-looking statements are uncertain and outside 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. 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 months 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. Finally, this release has been submitted to the SEC on Form 8-K. Now I would like to turn the call over to the company's President and CEO, Dave Duvall.

Dave Duvall, CEO

Thank you, Sandy, and thank you all for joining to review our 2024 third quarter results. Before John and I summarize our third quarter results, I want to share some exciting updates on our Invest for Growth strategies. First, we announced on October 28 that Alex Bantz has joined the company as our new Chief Commercial Officer. We understand that strong, capable leadership is fundamental to the successful execution of any strategy. Appointing Alex to this newly created role is an important step in our sales and marketing transformation to accelerate Core's 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 tenure in building relationships, driving revenue programs, and aligning market strategies with a customer-centric approach. 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. We exhibited in our first Mexican composite trade show at Poliplast in Monterrey, Mexico, which demonstrates the 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. Our third quarter sales were $73 million, and we generated $7.5 million in adjusted EBITDA or 10.3% of sales, contributing to a year-to-date free cash flow of over $23 million. Our net income was $3.2 million or $0.36 per diluted share. 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 and 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. Now I want to turn the call over to John to cover the financials in more detail.

John Zimmer, CFO

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. As previously discussed, the Volvo transition has started and is impacting the second half of 2024. 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 affected by two customer insourcing of certain products we were producing in 2023 as overflow molders. 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. 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%. 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 variable costs during times of lower revenues. Our operational team has been proactive in addressing the revenue slowdown and has done an excellent job reducing variable costs in the past two quarters. 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. 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 cost of $228,000 and $612,000 of unfavorable foreign currency translation. As we disclosed in our earnings release, we completed a fixed cost and SG&A reduction in force during the third quarter, which is expected to generate annual savings of approximately $2.6 million moving forward. This rebaseline of fixed costs at our headquarters and plants was partially driven by the decrease in Volvo business, but also to better position our cost structure going forward when revenues begin to rebound. 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. Net interest income was $144,000 in the third quarter, which included $440,000 of interest income on cash balances, an improvement from $187,000 of net interest expense in the prior year quarter. The quarter's effective tax rate was 18.7%, comprising the weighted tax costs from the three tax jurisdictions where we operate. 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. 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. Please see our earnings release for GAAP to non-GAAP reconciliation tables. Turning 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. 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. 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 million to $13 million. 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. 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 1x. We have optimized our working capital efficiencies, resulting in $67.6 million on September 30. Our return on capital employed, a pretax return metric, was 10.8% on a trailing 12-month basis. Excluding accumulated cash available for future investment, our return on capital employed was 14.4%, aligning with our long-term targets of 14% to 16%. 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, not rushing into an acquisition that is not a strategic fit or doesn't meet our financial hurdles. We also understand that both organic and inorganic growth for Core Molding will provide long-term growth, enterprise value expansion, and strong cash flow generation. 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. 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%. The adjustment is primarily due to customer demand schedules changing during the less predictable upcoming holiday season. For the full year, we continue to forecast gross margins in the 17% to 19% range. As we have discussed on earlier calls this year, Volvo’s existing truck model transition began this quarter and will continue to pressure sales through 2025, with the most significant impact expected in 2025. We are encouraged by Core’s fit on Volvo programs and continue to work hard to earn future programs at Volvo and with other customers.

Dave Duvall, CEO

Thank you, John. We are 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. A key part of our strategy is to grow wallet share and continually develop the resources to solve customer problems with a high-value Core Molding solution. We want to continue to be first in the customers’ mind to industrialize their designs. We also want to take full advantage of our large portfolio processes and support customers with cost-saving opportunities. Cross-selling of thermoplastic and thermosets allows us to offer customers a unique and, in many cases, lower-cost overall solution with a higher value alternative. This is another cornerstone of our sales and marketing initiatives. 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. 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. 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 interest rate increases, supply chain shortages, and rapid inflation to name a few—not an excuse, just a fact. 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 provide more insight into what we have achieved and where we’re going with the company. 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. We improved our basic business performance by $27 million on $40 million less revenue. I mention this because, as we’ve consistently discussed, our focus until this year has been internally aimed at creating a strong team and business model that can execute and serve current customers better than the competition. A strong team operating with strong execution systems should always be a prerequisite for driving growth. We communicated this externally through our must-win battles of operational turnaround first and then the product line portfolio rationalization that we did after that. Our next step is investor growth to leverage the execution engine that we have created, growing a profitable business that can serve customer needs better than our competition and is a highly trusted supply partner to blue-chip companies. Core produces complex, large, and ultra-large specific-used composite parts. We are able to offer our customers unique manufactured solutions supported by our expertise and wide portfolio processes. Most of these are large programs working with large customers that are single-source and do require a varying level of validation prior to product launch. This creates a business model with a revenue stream characterized by long-term programs, large complex single-source solutions, and direct ties to the success of our large customers and their markets. The three steps in priority order of our five-year Invest for Growth strategy are directly linked to optimizing that business model: 1. Sales force 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. 2. We are advancing our technology functions to further enhance our expertise to solve customer problems. 3. Acquisitions and diversifications, expanding sales channels, complementary technology and resources, and footprint expansion. So in 2022 and 2023, we experienced 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, and industrial. 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. We believe that the markets we serve are stabilizing to a more normal cyclicality and demand level. 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. Currently, more than $100 million is in the final pipeline stage of negotiation. This reflects cautious optimism among customers as they prepare for significant investments. 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. Our initial growth efforts and investments are already yielding wins, not only with existing customers but also in exciting new markets. 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. We’re thrilled about the possibilities in these emerging verticals and look forward to introducing even more products in the coming months. We also anticipate a peak in the truck market by 2026, with early signs emerging as soon as mid-2025. 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. 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. This is a testament to the effectiveness of our improvements. 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. Importantly, this advance enables us to enhance our SMC formulations for external customers, opening doors to new revenue streams and material sales. I believe we’ve proven that we’re a team that follows through and executes, especially in challenging times, and our track record speaks for itself. Simply stated, 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. 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. Success is demonstrated by being awarded the BRP Gold Award and the PACCAR 10 PPM award. We then rationalized our entire product line portfolio to capture fair market value for the solutions we provide. The next step, our must-win battle, is our Invest for Growth strategy. I’m confident that our Invest for Growth initiatives will be equally successful and allow us to fully leverage the exceptional capabilities we built at Core Molding. This is where the true excitement begins. This is why we’ve done it all. Our momentum is growing with a strong pipeline of new opportunities in the truck market, including quotes for major programs like Volvo. 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. Our next step in this journey is Invest for Growth, and we’re fully committed to making this phase as successful as the last. I am grateful for the hardworking collaborative team at Core and want to thank the entire team for embracing the significant change throughout our transformation and the successful execution of our must-win battle initiatives each year. I also want to thank our customers, shareholders, and the Board for their continued support. 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, Operator

Our first question will come from Chip Moore with Roth MKM. You may now go ahead.

Chip Moore, Analyst

Hey, Dave and John, good morning. Thanks for taking the question. I wanted to ask about the $100 million plus in your pipeline that’s moving further along. Maybe just expand on that sort of where that business lies in terms of mix and I assume your expected win rate there would be higher, but any thoughts.

Dave Duvall, CEO

Yes, for sure. And really, when we look at it relative to the team here, the pipeline is somewhat inverted. So you’re seeing it move through to different phases, and we’re seeing it at the last phase. 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 of bottleneck in that phase. They are large programs. A lot of the work that we see is in different industries. So we have a lot of programs that are in what we call the construction or Con/Agg area as well as truck and power sports. But we are seeing customers maybe slow down a little bit on launching these programs. Usually, for a customer, it’s pretty large tooling programs that they have to approve when they launch the program and source us with the program. So that’s usually what we see right now, whereas a year and a half ago, it was a rush to get things done.

Chip Moore, Analyst

Got you. Yes. And I imagine having some more certainty on the political environment doesn’t hurt as well.

Dave Duvall, CEO

Yes, I hear that. It's got something to do with it as well.

Chip Moore, Analyst

Yes. We’ll stay tuned. I guess 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?

John Zimmer, CFO

No. Again, I think we kind of talked through the Volvo piece. The Volvo transition will occur next year, and that will negatively impact our sales as we’ve been saying. Right now, we’re early in the process of looking at next year; we track what customers are saying to the outside world more than what they're saying to us internally. Most of our customers—BRP, Polaris, Generac, UFP—have been pretty silent on next year at this point. I think there’s a lot of our customers trying to figure out, again, not just the political environment but how fast interest rates are coming down. So it’s probably a little bit early for next year at this point. Volvo is the one piece we know that’s happening. The truck market, ACT does say is a little softer next year, but a real strong rebound is expected in 2026. So I think the truck market will see some softness. Everything else, we’re just in a wait-and-see mode at this point.

Chip Moore, Analyst

That’s helpful. That’s helpful. And Dave, I think you called out a win in, I guess, it was in bedding structures in health care. Any—it seems like a new market, maybe not, but it sounds like…

Dave Duvall, CEO

Yeah, that’s pretty exciting. We’ve been trying for that one. I think we went back through it. It’s been eight years talking with that customer. Right now, we are—it's on a hospital bed. So the support structure for the hospital bed, which—that’s our first program to win. Right now, the customer is delighted with the timing and everything that we met. So I think that can be another growing diversification channel for us.

Chip Moore, Analyst

Great. Great. And maybe a last one for me just on the cost side. You talked about some actions you’ve taken. When do we see that benefit fully roll through, John? And are we done with sort of the one-time costs? Is that all this quarter? Thanks.

John Zimmer, CFO

Yes. Most of the benefits—we did it at the end of the quarter, maybe actually a little bit into the fourth quarter to be truthful; there was a little bit of timing on when it happened. So there will be a little bit more cost that comes through in the fourth quarter. But most of the benefits, you should start seeing them as early as this quarter. It was primarily labor costs. So we’ll see the benefit coming through this quarter and moving forward, with pretty much a full impact in the fourth quarter.

Chip Moore, Analyst

Got it. Okay. Awesome. Appreciate it. Thanks.

Dave Duvall, CEO

Thanks, Chip.

Operator, Operator

Our next question will come from Bill Dezellem of Tieton Capital. You may now go ahead.

Bill Dezellem, Analyst

Thank you. I’d like to start with the hospital bed. Would you please kind of walk us through exactly what it is? Can you help us visualize what it is you’re actually doing on the bed? And then secondarily, how that process worked over the last eight years 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 bed?

Dave Duvall, CEO

Yes. We had originally contacted this customer about eight years ago through our sales agent group. We started working with them on an opportunity about 1.5 years ago. What we’re producing and designing with them is they’re changing from a sheet metal part. The part that is underneath the bed that holds the structure of the person is what we’re making; it’s that platform underneath the entire bed. The bed would sit on top of that. Really, it’s going through the validation and development, changing the material. We were able to use a higher value, lower-cost option for the customer and design features into that molded-in features that you couldn’t do with steel. The actual development from initial concept to today, where we're actually tooling for production, is probably about a year.

Bill Dezellem, Analyst

And not to oversimplify this, but the underneath the person sounds very similar to the underneath of a golf cart or of a watercraft..?

Dave Duvall, CEO

I agree. I completely agree that the concept and the structure we did on the bed was very similar to the concept and structure we had looked at on the golf cart application that we were originally quoting. We still have other golf cart opportunities. You also see that on ATV and UTV as well. We won the skid plates on all the ATV and UTV, so the new regulation coming next year prohibiting something from penetrating the bottom of the vehicle and impaling the driver or passenger is a big part of the wins as well. Same process, same structure.

Bill Dezellem, Analyst

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 where they're at on a…

Dave Duvall, CEO

Yes. It depends on what the original plan was. So this was originally two years ago when they were looking at transitioning. Right now, they are in the middle of the transition to the new program; it’s ramping down. There are different models. They are commonizing their Volvo and Mack programs. So right now, they are separate. As they phase in and phase out, it depends on whether it’s Volvo or Mack volumes. They are phasing out at the end of this year and through next year and into the beginning of the following year. It’s quite a long phase-out timeframe because there are so many part numbers going to a common part number.

Bill Dezellem, Analyst

And is it your sense that this process is moving slower or faster in line with what they were estimating, let’s say, earlier this year?

Dave Duvall, CEO

I would say everything always moves slower than people plan.

Bill Dezellem, Analyst

Great, thank you.

Dave Duvall, CEO

Thanks.

Operator, Operator

It appears there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Dave Duvall, CEO

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.

Operator, Operator

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