Earnings Call Transcript - EML Q2 2024

Operator, Operator

Greetings. Welcome to the Eastern Company's Second Quarter Fiscal Year 2024 Earnings Call. Please note this conference is being recorded. I will now turn the conference over to your host, Marianne Barr, Treasurer at the Eastern Company. You may begin.

Marianne Barr, Treasurer

Good morning, and thank you, everyone, for joining us this morning for a review of the Eastern Company's results for the second quarter of 2024. With me on the call are Eastern's President and CEO, Mark Hernandez, and Eastern's CFO, Nicolas Vlahos. The company issued an earnings press release yesterday after the market closed. If anyone has not yet seen the release, please visit the Investors section of the company's website, where you will find the release under Financial News. Please note that some of the information you will hear during today's call 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 expenses, 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. We undertake no obligation to review or update any forward-looking statements to reflect events or circumstances that occur after the call. For more information regarding these risks and uncertainties, please refer to the risk factors discussed in our SEC filings, including Form 10-K filed with the SEC on March 12, 2024, for the fiscal year 2023, and Form 10-Q filed with the SEC on August 6, 2024. 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. A reconciliation of each of the non-GAAP measures discussed during today's call to the most directly comparable GAAP measure can be found in the earnings press release. With that introduction, I'll turn the call over to Mark.

Mark Hernandez, CEO

Thank you, Marianne, and good morning to those who are joining us by phone and also via the web. Over the last several months, we have continued to push forward with our transformation program for Eastern, methodically taking additional steps to enhance the company's day-to-day business operations and strengthen customer relationships. Our second quarter results, which include higher sales, increased gross margins, and improved net income, demonstrate some of the progress we've made. However, much remains to be done. We are especially pleased that when two of our commercial vehicle customers suddenly experienced severe supply disruptions this spring, the actions we've taken to enhance Eastern's business agility enabled us to jump on the opportunity and respond quickly to their needs, improving our own financial results in the process. Some of you who haven't dealt with supply and logistics issues for as many years as I have might ask, what exactly do you mean by agility in this case? So I'd like to take a few minutes to explain the steps that we've taken to make Eastern more agile and set us apart from our competitors. An agile solutions provider is one that consistently emphasizes efficient processes, empowered employees, and fast access to information so that it is nimble enough to respond smoothly to sudden changes in supply and demand. An agile approach allows the company to quickly and decisively seize new business opportunities and achieve positive outcomes. At Eastern, the actions we've taken in recent months to establish ourselves as an agile solutions provider include implementing cellular manufacturing systems to better organize our machines, parts, tools, and workstations; fabricating our own assembly lines; and error-proofing the applications so assembly cannot be done incorrectly. To be clear, we're not pursuing high-priced solutions but pragmatic ones that will enable the company to work faster and be more profitable. These steps help position us to respond to our customers' unexpected needs this spring and contribute to our solid second quarter results. These actions are also contributing to our goal of changing the way Eastern is viewed from simply a product manufacturer into a true partner to our customers. As I described during our first quarter call, our goal is for Eastern to be the company our customers want to do business with, so they actually look for opportunities to work with us and are invested in our success. The higher backlog we have now, up 43% from a year ago, demonstrates that our approach is having a positive impact. Going forward, we expect our proven ability to react swiftly to our customers’ supply chain issues to help us tap previously untapped business opportunities. Although the situation hasn't yet normalized as our customers look to reinforce their supply bases and avoid being tied to any one source, we believe there's an excellent opportunity for us to gain additional business. And of course, agility isn't tied exclusively to new business opportunities. It also means being nimble and changing course within the organization to establish a stronger business foundation, adjust to markets as they change, and recalibrate our business to service our customers' evolving needs. I've talked in previous earnings calls about the four pillars we're using in our value creation strategy: disciplined operations, effective capital utilization, focused commercial business, and value-added acquisitions. All of these contribute to the company's business agility and, although we've made a lot of progress since I joined Eastern last year, there is still work to be done and many opportunities to use the pillars to improve the company's business performance. Before we turn to that part of today's agenda, I'll turn the call over to Nick for a quick review of our second quarter financial results. Nick?

Nicholas Vlahos, CFO

Thank you, Mark, and good morning, everyone. As Mark said, I'll run through our results for the second quarter of 2024. For the period, net sales increased 7% to $73.2 million from $68.3 million in the 2023 period, primarily due to increased demand for truck mirror assemblies and returnable transport packaging products, offset by lower demand for truck accessories. Truck mirror assembly volume was favorably impacted by additional orders of approximately $5 million from two key customers due to our operational flexibility and competitive advantages, as Mark has described. Our backlog as of June 29, 2024, rose 43% to $107 million compared to $75 million as of July 1, 2023. The increase was driven by increased orders for various truck mirror assemblies and returnable transport packaging products. Gross margin as a percentage of sales in the second quarter was 25% compared to 22% in the 2023 period. The increase in margin primarily reflected improved price-cost alignment and other cost savings initiatives. As a percentage of net sales, product development costs were 1.8% for the second quarter of 2024, compared to 2.1% in the 2023 period. Selling and administrative expenses increased 2% for the second quarter of 2024 compared to last year's period. The increase was primarily due to higher payroll-related and travel expenses, partially offset by lower legal and professional expenses and lower selling costs. Other income and expense in the second quarter of 2024 decreased $0.3 million compared to the 2023 period. The decrease in other income of $0.3 million was primarily driven by a favorable adjustment to the final settlement of our swap agreement with Santander Bank, partially offset by expenses associated with the closure of associated toolmakers in Q2 of 2023. Net income for the second quarter of 2024 was $3.5 million or $0.56 per diluted share, compared to net income of $1.4 million or $0.22 per diluted share for the 2023 period. Adjusted net income, a non-GAAP measure, for the second quarter of 2024 was $3.5 million or $0.56 per diluted share compared to adjusted net income of $2.5 million or $0.40 per diluted share for the prior year period. Adjusted EBITDA, a non-GAAP measure for the second quarter of 2024 was $7.2 million compared to $5.9 million for the 2023 period. At the end of the second quarter, our senior net leverage ratio was 1.2:1 compared to 1.4:1 at the end of the first quarter. In addition, we invested $2.8 million in capital and paid dividends of $1.4 million in the first six months of 2024. We generated $10.3 million of cash from operations during the first six months of fiscal 2024 compared to $13.6 million during the first six months of 2023. Cash flow from operating activities in the first six months of 2024 was lower compared to last year's period, primarily due to increases in accounts receivable and lower reductions in inventory, partially offset by increases in accounts payable. As of June 29, 2024, inventories totaled $56.9 million, a decrease of $2.4 million from the end of fiscal year 2023 and a decline of $0.6 million from the end of last year's second quarter. During the second quarter of 2024, we repurchased 10,000 shares of common stock under the share repurchase program our Board authorized in August of 2023, bringing us to a total of approximately 60,000 shares repurchased under the buyback program. That completes my financial review. I'll now turn the call back over to Mark.

Mark Hernandez, CEO

Thanks, Nick. At this point, let's turn to our strategies and actions for the remainder of the year. Although we made a lot of progress in the last 18 months by tackling the highest opportunity areas first, we are pleased with our second quarter results. There's still a lot to be done in the pursuit of operational excellence, stronger customer relationships, and consistent results throughout our organization. In addition, there's been some softening in the commercial vehicle market and in certain electric vehicle programs, which has been negatively impacting our demand for custom returnable packaging solutions. As a result, we're facing some headwinds in the second half of 2024 that we didn't expect at the beginning of the year. Of course, there are always bumps in the road, whatever they may be, but we're determined to position Eastern to come out stronger on the other side to help reach our basic goal of consistently delivering solid financial results and creating shareholder value. We're continuing to evaluate all our businesses for long-term performance. We're doing a deep dive into each operating division, looking at the profitability of their products versus the cost of goods sold, evaluating their manufacturing agility, analyzing their ability to deliver their products on time, and reviewing the accuracy of their forecasts while improving the quality of their decision-making processes. Obviously, this process will take some time, so we'll provide an update in future quarters. Another important priority for the second half of 2024 is to focus on our backlog. We want to maintain it at a higher level, we've now reached while, at the same time, ensuring through production efficiency, it's converted to cash smoothly and quickly as possible, and is also properly reflected in our forecasting processes. A couple of other points before we turn to the question-and-answer portion of our call: we've been gradually moving ahead with the plastics manufacturing pilot program I mentioned last quarter. As you recall, we've been planning an investment of $3.5 million in plastics manufacturing capabilities to help build the business of all three of our operating divisions. We purchased one machine in the second quarter that is now being installed, and two other machines are coming soon. We will be well on our way to launching this effort. Although it's a relatively modest initiative, it's a good example of the opportunities for vertical integration I talked about in our first quarter call that will help us capture cost savings in our cost of goods sold and drive gross margin improvement. Now with that overview of recent developments, we're ready to open the floor to questions. Operator?

Operator, Operator

While we poll for questions, I will hand the call over to Mark Hernandez for some pre-submitted questions. Mark?

Mark Hernandez, CEO

I'd like to kick off today's question and answer session with some shareholder questions we've recently received that I think will be of interest to the wider investment community. Now that we've reported our Q2 results, we can address them more fully. So the first question is: How do you expect the current more uncertain economic environment to impact Eastern? And how are you adjusting your approach to the business? As we've seen in the recent economic results of the stock market, we think that we are impacted just as much as anybody else. However, we're in the commercial vehicle industry, and I've been in a cyclical business for over 30 years. We believe that the commercial vehicle industry provides a soft floor regarding how much we will go down. At the same time, our agility and our ability to address the decline or the cyclical nature of our business allow us to position ourselves to maintain profitability as the business cycles. On the commercial vehicle side, interest rates are heavily impacting the commercial vehicle industry. However, the replacement cycle of trucks at large fleets will continue as these machines are getting outdated and need to be replaced going forward. So we'll be positioned to take advantage of that. The second question we've received relates to the direction of the commercial vehicle industry: For how long do you think electrification can be pushed out, and why is this happening? What we've seen in the automotive and truck business is that electrification is being delayed. I have the fortunate knowledge of being an engineer and working on propulsion systems for most of my career, and the technology being produced today is not ready for the infrastructure side as well as for the larger trucks that go long distances. We'll be looking forward to participating in that going forward. We see this in some of our divisions and how we position ourselves in returnable packaging solutions with lighter products that we're working confidentially on with one of our largest customers to improve the weight load of a trailer, which saves them money on inbound logistics, as well as participating in battery cell packaging solutions. Full electric vehicles require a lot of batteries, and that's getting pushed out. However, there's a shift to hybrid electric, which has a battery solution, albeit smaller than the current fully electric version that we will be participating in going forward.

Nicholas Vlahos, CFO

So we have one question coming in online. The question was: What was the debt reduction for the second quarter? The debt reduction for the second quarter was $750,000, which is our normal scheduled debt reduction for the quarter.

Mark Hernandez, CEO

Do we have any other questions, operator?

Operator, Operator

There were no questions from the lines at this time. I would now like to hand the call back to Mark Hernandez for closing remarks.

Mark Hernandez, CEO

Thank you for your time today. As you know, we're focused on achieving consistent earnings and profitability quarter-over-quarter and year-over-year, even within cyclical markets and a more uncertain economic environment. Accordingly, we're continuing to move forward with our action plans, efficiency efforts, and disciplined operational execution in the second half of 2024. We're staying deliberate in our strategy for Eastern and believe we are well positioned to service our current customers and grow our businesses. We look forward to providing you with an update in November. In the meantime, if you need additional information, please feel free to reach out to us. Thank you.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.