Core Molding Technologies Inc

AMEX:CMT

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, everyone. Welcome to the Core Molding Technologies First Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the call over to Sandy Martin, Three Part Advisers. Please go ahead.

[Sandra Martin]

Thank you, and good morning, everyone. We appreciate you joining us for Core Molding Technologies' conference call to review first 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 of the company's control. Actual results may differ materially from the [Audio Gap]

[David Duvall, executive]

Key suppliers for the Sea-Doo personal watercraft and the Sea-Doo Switch. Our team has been awarded this prestigious recognition for Core's manufacturing and logistics excellence, high-quality products and processes and superior customer service. Being recognized as a gold supplier is a culmination of the complete business transformation that we've been executing and communicating over the past several years. I am proud of what the team has accomplished and the magnitude of this accomplishment can be seen in our tremendous improvements in our basic metrics.

For safety, we reduced our incident rate by 44% in the last two years and are much better than the industry average. For people, we continually improve our focus on individual and organizational development, which is reflected in our low turnover of salary team members now less than 12% annualized. We've implemented annual leadership development programs, organizational and career development programs, technical certification programs, along with many other training and employee engagement initiatives. Employee development is and always will be a key focus area for Core molding.

In quality, we've reduced our customer PPM by an incredible 89.6% in the last four years and 17% in the last two years. In delivery, we improved our on-time delivery by 21% in the last two years and are now at 99% on-time delivery. We have reduced scrap and rework costs by over 51%. We increased our production capacity by over 20% with existing assets and made strategic investments in our plans to increase capacity through efficiencies, automation, facility improvements, which increased our total current capacity to between $425 million to $475 million in annual sales. We first significantly improved our customer support and service levels, which then enabled us to make the necessary changes to our pricing to bring prices back in line with market rates, which provides the financial resources necessary to continue to improve our operations and customer service levels.

As a company, I believe we're in the best overall business operating condition in company history. Our focus has been on implementing robust business systems throughout the transformation. I am confident that our improvements are sustainable and that we have some of the highest service levels in the industry. The company has the organizational capability, operational infrastructure and financial stability in place to drive revenue growth through new programs, acquisition opportunities and existing programs as demand levels rebound. We have prepared the organization for growth. The engine is ready. And now we're at the invest for growth phase or better stated, our Must Win Battle is now invest for growth which I will talk about later.

I'm also excited to share that we have published Core's second sustainability report, which showed solid progress from last year. This comprehensive report published on our website offers an overview of our sustainability strategy and provides all core stakeholders with a view of our progress against established goals and commitments. Sustainability is embedded into our values and business and is instrumental in driving organizational change that reduces both enterprise risk and costs. Also important is that our sustainability systems allow Core Molding to be a part of something bigger than ourselves by providing a structure [Audio Gap] for our organization to support environmental stewardship. Our second annual report details accomplishments in 2023 and progress on our important [ 30 by 30 ] targets. We intend to reduce our company's energy consumption, greenhouse gas emissions and landfill waste by 30% by the [Audio Gap] sales of $78 million, down 21.5% due to challenging 2023 comparisons and end market headwinds that we will discuss more in a moment.

When we look at sales sequentially compared to the fourth quarter of 2023, sales for the first quarter of 2024 increased by 5.9%. Gross margin for the 2024 first quarter was 17% compared to 17.8% in the prior year first quarter and up 220 basis points from 14.8% in the fourth quarter of 2023. Anticipating lower sales, the company reacted quickly and leaned on the operational improvements made over the past several years to offset lost fixed cost leverage. We also generated $8.8 million in adjusted EBITDA or 11.2% of sales and we reported positive free cash flows.

In summary, for 2023, we completed the second Must Win Battle initiative, and the results are improved operational efficiencies and a solid foundation for continuous improvement in all of our plants. That work allowed us to operate with much more stability, consistency and translating to more stable margins and improve product line profitability. Our intense focus or Must Win Battle is on sales this year, and our business fundamentals remain strong. We continue to work on landing and diversifying into new business and increasing our opportunity pipeline.

With that, I'd like to turn it over to John to cover the financials in more detail.

[John Zimmer, executive]

Thank you, Dave, and good morning, everyone. As Dave mentioned earlier, our total net sales for the first quarter were $78.1 million, down 21.5% compared to a year ago. And sequentially, our net sales improved by 5.9% up from the fourth quarter's sales of $73.8 million. Seasonality and mix shifts produced growth from Q4, and we believe that including sequential performance comparison allows us to explain recent changes in customer demand. As expected, first quarter sales reflected tough prior year comparisons, notable mix shifts and rebalancing of customer inventory levels.

Q1 medium and heavy-duty truck sales shifted from 50% of sales in 2023 to 55% this year, and power sports shifted from 22% of sales last year to 25% in the first three months of 2024. In addition, other industries, including building products and industrial utilities continue to produce soft sales. The first quarter gross margin was $13.3 million or 17% of sales compared to 17.8% in the year ago quarter. With lower sales versus prior year, our fixed cost operating leverage was negatively impacted in the first quarter by approximately 170 basis points. Due to the operational improvements and pricing changes, we were able to offset a significant portion of the lost fixed cost leverage.

Before our operational improvements, volume decreases and mix shifts [Audio Gap] historically created more volatility in gross margin. However, we now have better operational efficiencies and profitability across all our plants, which allows us to offset fixed cost [Audio Gap] $9.7 million in the prior year, primarily due to lower bonuses, labor and benefit costs and favorable foreign currency translation. Operating income for the quarter was $4.7 million or 6.1% compared to $8.1 million or 8.1% in the year ago period. Net interest expense was $82,000 in the first quarter, down from $356,000 in the prior year quarter. Netted in the $82,000 net interest expense in the first quarter of 2024 is $252,000 of interest income from our accumulated cash balances. The quarterly interim effective tax rate was 21.5%, comprising the weighted tax costs from the three tax jurisdictions, which where we operate. Our net income totaled $3.8 million or diluted EPS of $0.43 compared to $5.9 million or diluted EPS of $0.66 in the comparable year period. Our first quarter adjusted EBITDA was $8.8 million or 11.2% of sales compared to $12.2 million or 12.3% of sales in the prior year quarter. You can refer to our GAAP to non-GAAP reconciliation tables are at the end of our press release.

Turning to the company's financial position. We ended the quarter with $26.6 million of cash and cash equivalents. The company's cash provided by operating activities was $5.1 million for the first quarter, which compared favorably to the $4.6 million in the 2023 first quarter. For the first three months, capital expenditures were $1.9 million and free cash flows were $3.2 million, an improvement from the $2.5 million in the prior year. We currently expect 2024 capital expenditures to be approximately $13 million for the year. As of March 31, 2024, total outstanding liquidity was $76.6 million, which includes cash and $50 million available under the revolver and capital credit lines. The company's term debt was $22.7 million at the end of the quarter, and our debt to trailing 12 months EBITDA ratio was less than 1x. Our working capital continues to be well managed and netted to $61 million on March 31, 2024. Our return on capital employed, a pretax return metric was 14% on a trailing 12-month basis. Our capital allocation strategy remains consistent with prior guidance and includes investments in organic growth, share buybacks, acquisitions and repayment of debt.

Now we will provide an update on our 2024 sales outlook. Nothing has materially changed from our comments a few weeks ago, and we expect 2024 annual net sales to be down 10% to 15% compared to '23. Our sales outlook includes a cyclical demand slowdown in truck, stabilizing customer inventory as well as consumer demand environment that returns to more normal seasonality. Customer inventories are leveling down in certain end markets like power sports, which may be impacted by Fed rates staying higher for longer. As a reminder, Volvo is transitioning from its existing truck model to a new one that Core is not part of beginning in the second half of 2024 and continue through 2026. We have a good relationship with Volvo and active bids. We believe we are positioned to secure programs outside the current programs. We will continue working on profitability initiatives, focusing on additional continuous improvements across all product lines.

I'll let Dave further discuss our plans and outlook for the year. With that, I'd like to turn it back to Dave. Dave?

[David Duvall, executive]

Thank you, John. We are highly focused on offsetting certain end market headwinds, truck cyclicality and the end-of-life programs. As John mentioned, we have seen inventories rebalancing down for power sports and the industrial and utilities markets. Even so, we are seeing a return to pre-pandemic levels. We have aggressively ramped up lead generation by partnering with a professional sales agency, added sales resources, ramped up trade show presence and we are streamlining our quote-to-cash processes to maximize our organic business growth. Actually, this week, I'll be supporting our sales and marketing team at our display at the NPE show in Orlando [ through ] the end of '24 through 2025. We know that in our industry, a quote to cash is over a year, so efforts today are most likely going to start delivering results in 2025 and beyond. We are also prepared for the ACT or Americas Commercial Truck Research forecasted truck increase in 2025 and 2026 which is driven by the 2027 emission regulations.

Even though our customers are currently in a reduced demand period, our business is well positioned as we serve blue-chip customers with sole-source products that are foundational to our customers' long-term growth plans. We remain focused on continuous improvement to lower overall costs and prepare for higher demand levels. Our technical solution sales approach, provides our customers unique solutions for their highly specialized needs, and we have never been in a better position to benefit from our extensive portfolio of [ presses ], processes and industry serve. Our engineered solutions allow us to work on new environmentally friendly and sustainable products. And we are seeing opportunities in 2024 from the infrastructure [ bill ] that Core Molding is well suited to provide, including projects driven by the Buy America Build America or BABA Act. We have built a resilient organization well positioned for growth, and our strategy supports the creation of long-term shareholder value. Our Must Win Battle in 2024 is invest for growth, and that is what we are driving today. We appreciate, and I want to thank our dedicated Core Molding team. Our team is our competitive advantage [Audio Gap]

[Operator]

[Operator Instructions] And today's first question comes from [ Chip Moore ] with Roth MKM.

[Unknown Analyst]

I wanted to ask your comments, Dave, around the engines ready for growth, investing in growth, maybe just start there, if you can expand on some of the organic and inorganic efforts that you're going after this year?

[David Duvall, executive]

Yes. We've done a lot to really drive the lead optimization as far as all the leads that we've already had in the system business maybe that we had looked at in the past. So a lot more on the lead generation side as well as on the immediate or short-term working with customers on contract molding or transfer molding.

When we're looking at customers in the truck, personal watercraft, ATV, UTV, those are more longer-term design phase. So we're already partnering with customers in those products. Some of those we've already won that would be part of that [ $25 million ] and then really driving in the industrial and utilities and packaging areas on being able to either develop the new products for conversions, working with them currently and developing products where we can transfer the molds. There's a lot more on the lead generation side and continuing on to industrial and utilities and still growing our ability in those areas.

[Unknown Analyst]

And maybe the opportunity pipeline boosted quite a bit this quarter versus when we talked fairly recently, maybe just talk about the composition of that pipeline, has that shifted with some of the changes in the end markets that you're seeing right now? And then what are you seeing in some of the newer areas? Growth opportunities?

[David Duvall, executive]

Yes. We're still seeing some opportunities in the automotive side as far as underbodies and tailgate type work. So we're looking at that. We're still working on the automotive side. Some of those are a little longer starting in '25, '26. Also some of the newer truck programs that we're looking at and power sports. We do have probably about 30% of it in the industrial and utilities area.

[Unknown Analyst]

And just one on the heavy-duty truck market, right, given that it's a sizable piece of your business. Can you expand on the [ '27 ] emissions drivers when you might see that? Maybe you're seeing some of it already to trickle through in terms of pull forward or demand? And from some of those regulations?

[David Duvall, executive]

No, that's a really good question. And we are starting to see that with our customers and talking with them as well as in the ACT. So last year, '23, the volume was about [ 340,000 ] Class 8, this year it was increased from [ 285,000 ] to [ 304,000 ]. Next year, we're looking at about [ 320,000 ] to [ 330,000 ] and then '26 is the peak year of [ 346,000 ]. So what we're seeing is that as the emissions come in, the [ '27 ] emissions are a costly one. So what companies are doing they're going to start preordering prior to the '27 cost increase. And when they start filling build slots, then you start seeing them come in earlier and earlier into the '24, '25 time frame. And that's what we're getting prepared for now and talk with customers about.

[Unknown Analyst]

And maybe last one, maybe for you, John, on the gross margin side, that 17% to 19% range for the year. Maybe just talk about baseline assumptions there, what gets you towards the higher end? Is it sort of the volume dependent, I assume? And then just remind us any quarterly dynamics to keep in mind here with seasonality and some of the other one-off impacts.

[John Zimmer, executive]

Yes. So seasonality is probably not going to hurt us as much this year as some of the mix has changed. We'll probably see better seasonality in Q2 and Q3. Q4 guys has always got holidays in it and everything else, and so it's always the most challenging. So my expectation is Q2 and Q3 would be a little bit higher than what we're at today.

One of the big pieces that drive us to the 17% to 19% is, I think at year-end, we kind of -- at the [indiscernible] -- in March for the year-end, we talked about how a lot of the utility guys had gone away, and it wasn't really ordering anything from us. So getting a little bit more volume back from those guys, we won't be adding any fixed cost leverage at all in order to do that. And so we can see just a little bit of a pickup in the sales side, we really should see the margins head towards that 19%. And so that's the real key is we get a little bit of a rebound in the revenues as we go into the second half of the year.

[Operator]

The next question comes from [ Bill Dezellem ] with Tieton Capital.

[Unknown Analyst]

Specific to the Building Products category, would you talk about the impacts versus the Q1 of '23 and then what drove the increase versus the Q4 of last year?

[John Zimmer, executive]

Yes. So building products for us is primarily a couple of different customers, and so it's not a lot of customers. From last year, we know our UFP sales are down. UFP sales through big-box retailers. And so as they have program changes with big box retailers, it eventually comes through to us and so we do know that they've been ordering less, and we expect that's something to do with who they're selling to this year versus last.

From an actual [ quarterization ] standpoint, Q4 is really a slow period for building products. Q1, Q2 are usually a little bit stronger as people start to put lattice and those types of things in the stores for people to start doing building products in March and April or billing projects in March and April and May. And so that's normally kind of a seasonality. But year-over-year, our business primarily with UFP is just down. And I think that's just a difference in their sales mix that they have to their end customers.

[Unknown Analyst]

And then relative to acquisitions, would you please talk about the pipeline and how you are thinking about acquisitions now?

[David Duvall, executive]

Yes. So we would look at an acquisition right now anywhere between about $20 million to $40 million acquisition. Really, we're looking at footprint, customer and industry diversification or sales channel development. I think focused processes really in the U.S. that we also need when we look at some of the infrastructure in the BABA is really structural foam, [ DLFT ] or large part injection molding.

I think the big thing for us when we look at footprint, and we look at sales channels, everything has to be a technical or a large part, not small parts. So really, the big driver is what we're looking at is footprint, sales channel development and industry diversification with specific processes.

[John Zimmer, executive]

Yes. One of the questions we get, and we've been doing a lot of work on also in this area is what are we seeing for valuations. We've met with probably different 25 bankers that really are in the -- in this industry that I know sell resin-based products. I kind of compare it to the housing industry, even though cost of financing has gone way up, the multiples haven't changed that much. We're hearing about 7% to 8% for a normal deal, not a specialty medical or something like that. And so one of the things that we are going to be very disciplined on is if you're buying at 7x to 8x enterprise value how fast can we get synergies from that acquisition, either cost synergies or sales synergies? And as you guys are aware, again, as Dave made a comment, is we're big part manufacturers. So our strategy is not usually to go in and buy a plant and shut it down and consolidate the plant and have all kinds of savings from that, it's actually to expand our footprint. So we're being diligent from that standpoint. Obviously, interest rates are a lot higher than they were over the last 15 years to finance them. And so we're definitely looking for opportunities that can get us to that 8% to 10% EBIT and return on capital employed of 16% and drive synergies pretty quick out of the gate. And so being a little selective on that because we haven't seen the valuations come down as much as we probably would have hoped to do with higher financing costs.

[Unknown Analyst]

And is your sense that there are -- maybe address the quantity of acquisitions that you see out there, more or less -- what's your view?

[John Zimmer, executive]

Yes, [ less ] in our industry. So like I said, one of the things we talked to a lot of the different bankers in this industry, less in this industry. There's still [ PE ] guys play in the game. They still have money to play. And so -- but from an overall -- I think the challenge is there are a lot of sellers that still want that 7x, 8x, 9x, 10x multiple, and there's a lot of buyers that have gotten a little bit more diligent and said that's just too high with the financing rates where they are today. And so when we did talk to over the last couple of weeks, I mean, we had lunch with one of our bankers, P&C Capital Markets, and they said that they've seen a slowdown in this industry also at this point. So we're seeing a little bit of a slowdown because I think sellers are keeping their prices high and buyers just are being more rational as they go through this.

[Operator]

The next question comes from Tim Moore with EF Hutton.

[Timothy Moore, analyst]

It was great to see the gross margin, EBITDA margin come in pretty impressively for the quarter despite the sales declines or kudos on that cost savings and efficiency front. So maybe I'll just start off because two of my questions are already answered. Just kind of curiously, during your last earnings call, you mentioned, I believe it was $425 million to $475 million sales capacity in place. Just trying to wrap my head around some of the earlier comments about the Class 8 truck volume, it could be up to the peak in 2026. When you kind of look out for your sales capacity and maybe let's call it $425 million to $475 million, do you think it could be starting to fill that towards the end of 2026 and get those customer qualifications in terms in place [Audio Gap]

[David Duvall, executive]

You constantly have customers asking if we're going to be able to meet their peak demand coming up here in '25, '26, they're already looking at it. For sure, '26 is going to be a high year for us relative to truck as well as the additional programs that we got from the wins this year and the wins last year.

I think we still have the [ capacity needed ].

[Timothy Moore, analyst]

Good. No, no, it seems like it's really good and you've done very efficient additions. And yes, I got to imagine going to be bumping up against at least 2026 or late '27. Just one thing I want to kind of clarify, I know you talked about the Volvo program that -- maybe that one or two programs [ phasing ] out you mentioned in February. Are there any kind of additional sales one-off of customers' renewals over the next year? Is there anything else that could maybe unwind a little bit or be added to?

[David Duvall, executive]

Of the wins that we just talked about, about 40% of that is replacement business. So we're constantly -- we know ahead of time when the programs would be ending and when they'd be coming back. I think the challenge with the Volvo was that decision was actually made three years ago. But as John said, I think we have a great relationship with Volvo now and we're working with them. We're actually talking with them about that new program and being able to actually provide those parts as well or at least part of those programs.

[John Zimmer, executive]

Yes. And to follow up, we really don't have any other visibility to any other sales programs falling off. Like Dave said, one of our goals that we're actually bidding on business two, three years out. We have several of those programs that we've mentioned last year and this year, there are wins, which is replacement business three years out. And so we really don't have anything like a Volvo out there that we're aware of. I think our customer relationships are good in all those areas. And I think the original comment that Dave made about where we are operationally. We really do think operationally in this industry, we're pretty strong compared to some of our competitors that have gone through some challenges. And so I think we're really placed right. We've got to go win the business, and there's really no other major programs that we know of that are have been awarded away at this point or anything like that.

[David Duvall, executive]

I think a lot of what we worked on was really getting the business model right, being [Audio Gap] we've seen what that does in the past in 2018, '19.

[Operator]

And at this time, we are showing no further questioners in the queue, and this does conclude our question-and-answer session. I would now like to turn the conference back over to Dave Duvall for any closing remarks.

[David Duvall, executive]

So thank you for your continued interest in our company. We'll participate in the upcoming East Coast [ IDEAS ] Conference in New York in June, and we look forward to providing an update on our progress when we report the second quarter results in August. Thank you very much, and have a great day.

[Operator]

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