Participants
Sandy Martin; IR; Three Part Advisors, LLC
David Duvall; President, Chief Executive Officer, Director; Core Molding Technologies Inc
John Zimmer; Chief Financial Officer, Executive Vice President, Treasurer, Secretary; Core Molding Technologies Inc
Chip Moore; Analyst; ROTH Capital Partners, LLC
Bill Dezellem; Analyst; Tieton Capital Management
Tim Moore; Analyst; EF Hutton
Presentation
Operator
Good morning, everyone. Welcome to the Core Molding Technologies First Quarter Fiscal 2024 financial results conference call. Today, all participants will be in a listen only mode. Should you need assistance during today’s call, please signal for a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask your questions to ask a question, you may press star then one on your telephone keypad. If you would like to withdraw your question, please press star then two. As a reminder, this conference call is being recorded.
I would now like to turn the call over to Sandy Martin, three-part advisors. Please go ahead.
Sandy Martin
Thank you, and good morning, everyone. We appreciate you joining us for core molding Technologies conference call to review first quarter results for 2020. For joining me on the call today are the company’s President and CEO, Dave DeWalt, and EVP and CFO, John Zimmer. This call is being webcast and can be accessed through Core M ti.com via an audio link on the Investor Relations Events and Presentations.
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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 about our 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 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 on 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 and 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 eight K.
Now I would like to turn the call over to the Company’s President and CEO, David Duvall
David Duvall
Thank you, Sandy, and thank you all for joining us to review our 2024 first quarter results. I want to start today with some positive highlights related to our core molding team in the first few months of 2024. The spring, core was presented with BRP’s Gold Supplier award related to its Sea-Doo boats and personal watercraft models. Brp for Bombardier Recreational Products is the global leader in powersports vehicles on land, water and snow. I’m proud of our team and we are honored to be one of BRP’s key supplier for the Sea-Doo personal watercraft and the Sea-Doo switch.
Our team has been awarded this prestigious recognition for Core’s manufacturing, logistics excellence, high quality products and processes and superior customer service being recognized as a gold supplier as 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 salaried 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 model and quality. We 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 rework costs by over 51%. We increased our production capacity by over 20% with existing assets and made strategic investments in our plants to increase capacity through efficiencies, automation facility improvements, which increased our total current capacity to between $425 million of $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 and 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 shows 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 risks and costs. Also important is that our sustainability systems allow core morning to be a part of something bigger than ourselves by verifying a structure 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 end of 2030. And we think this is a sustainable goal to attain.
Turning to a review of our top-level financial results. We signaled a few weeks ago during our year end earnings call that 2024 sales expectations were lower than 2023. Today we reported sales of $78 million, down 21.5% due to challenging 2023 comparisons and end market headwinds that will 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 improved product line profitability. Our intense focus or must-win battle is all 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
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 powersports 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 continued to produce soft sales. 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. 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 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 leverage decreases and maintain more stable margins in changing demand levels. As was demonstrated in this quarter. We continue to expect gross margin to be in the 17% to 19% for the full year with the potential for gross margins in a quarter outside of this range.
SG&A expenses were $8.6 million compared to $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.
Quarterly interim effective tax rate was 21.5%, comprising the weighted tax costs from the three tax jurisdictions, which were 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 or at the end of that 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 of 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 31st, 2024. Total outstanding liquidity was $76.6 million, which includes cash and $50 million available under the revolver and credit 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 one times. Our working capital continues to be well-managed and netted to $61 million on March 31st, 2024.
Our return on capital employed, a pre-tax return metric was 14% on a trailing 12-month basis. Our capital allocation strategy remains consistent with prior guidance 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 powersports, which may be impacted by the Fed rate 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 the second half of 2024 and continued through 2026. We have a good relationship with Volvo in 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, but that I’d like to turn it back to Dave. Dave?
David Duvall
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 powersports in 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 tradeshow 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 and our display at the NPE. show in Orlando. We are also in the process of vetting potential acquisitions that meet our strategic growth criteria for sales, channel growth and footprint expansion. Our current sales opportunity pipeline is over $200 million, and I’m excited to report that we’ve been awarded over $25 million in new and replacement business that will launch near the end of ’24 through 2025.
We know that in our industry, the 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 America’s Commercial Truck research forecast and 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 cash costs and prepare for higher demand levels. Our technical solution sales approach provides our customers unique solutions for the highly specialized needs and we have never been in a better position to benefit from our extensive portfolio of PROSPER presses, processes and industry served. Our engineered solutions allow us to work on new environmentally friendly and sustainable products.
And we are seeing opportunities in 2024 from the infrastructure build that core molding is well suited to provide, including projects driven by the Buy America Build America or Bob 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. We also appreciate, and I want to thank our customers, shareholders and the Board for their continued support. With that, I’d like to open the line for questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) Chip Moore, ROTH MKM.
Chip Moore
Morning. Hey, Dave, John and everybody. Thanks for taking the question on Asia, a good good to hear your voice wanted to ask from your comments, Dave, around the engines ready for growth investment and growth. Maybe just start there, if you can expand on some of the organic and inorganic efforts that that you’re going after this year?
David Duvall
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 into 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. So a lot more on the lead generation side and continuing on to industrial and utilities and still growing our abilities in those areas.
Chip Moore
Understood that. That’s helpful. David, 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. How 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 some of the newer areas growth opportunities?
David Duvall
Yes, we’re still seeing some opportunities in the automotive side as far as underbody and tailgate type work. So we’re looking at that. We’re still working on the automotive side. Some of those are low longer starting in ’25, ’26. Also some of the newer truck programs that we’re looking at and powersports, we do have probably about 30% of it in the industrial and utilities area.
Chip Moore
Got it. That’s that’s helpful. And just one on the just the heavy-duty market right given that it’s a sizable piece of your business? And can you expand on the 2020 emission drivers when you might see that? And maybe you’re seeing some of that already into trickle through in terms of pull-forward or demand and from some of those regulations.
David Duvall
Now 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 eight. This year, it was increased from [285 to 304]. Next year, we’re looking at about 320, 330 and then ’26 is the peak year of 346. So what we’re seeing is that as the emissions come in as the 27 emissions are a costly one. So what companies are doing, they’re going to start pre-ordering prior to the 27 cost increase. And when they start filling build slots and 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.
Chip Moore
Perfect. That’s helpful. And maybe last one from me for you, John, on the gross margin side, that 17% and 19% range for the year. Maybe just talk about baseline assumptions there. What gets you towards the higher end is sort of the volume dependent, I assume? And then just remind us any any quarterly dynamics to keep in mind here with seasonality and some of the other one-offs impacts? Thanks.
John Zimmer
So seasonality is probably not going to hurt us as much this year as some of the mix has changed, you will probably see better seasonality in Q2, Q3, Q4, guys, as always, Scott holidays and 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 are at the data in March. For the year end, we talked about how a lot of the utility guys had it 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 you had a little bit of a rebound in the revenues as we go into the second half of the year.
Chip Moore
Very helpful. Okay. Thanks a lot. Appreciate it.
Operator
Bill Dezellem, Tieton Capital.
Bill Dezellem
Thank you. Specific to the Building Products catagory, would you talk about the impacts versus the Q1 of ’23 and then what drove the increase versus the Q4 and last year?
John Zimmer
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. You have P sells through big box retailers. And so they have program changes with big box retailers that 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 doability products until March and April and are building projects in March and April and May. And so that’s normally kind of a seasonality. But year-over-year, our business permanently with USPs just down, I think it’s just a difference in their sales mix that they have to their end customers.
Bill Dezellem
Great, thank you. And then relative to acquisitions, would you please talk about the pipeline and how you are thinking about acquisitions now?
David Duvall
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 US that we also need when we look at some of the infrastructure and the bar 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 is it 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
One of the questions we get, and we’ve been doing a lot of work on also in this areas is what we’ve seen for valuations. We’ve met with probably 25 different bankers that really are in the in this industry that I know sell you resin based products has sky-high kind of compared to the housing industry, even though cost of financing has gone way up, the multiples haven’t changed that much.
We’re hearing about seven to eight for a kind of 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 seven to eight times your enterprise value, how fast can we get synergies from the from that acquisition, either cost synergies or sales synergies.
And as you guys are aware, again, Dave made a comment is we’re a big part manufacturer. So our strategy is not usually to go in by 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 be 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.
Bill Dezellem
And is your sense that there are maybe address the quantity of acquisitions that you see out there more or less that? What’s your view?
John Zimmer
Yes, less than 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 P you guys play in the game. They still have money to play. And so but from an overall, I think the challenges are a lot of sellers that still want that 7 times, 8 times, 9 times, 10 times 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 you over the last couple of weeks, I mean, we had lunch with one of our bankers, PNC capital markets. And they said that they’ve seen a slowdown in this industry also at this point. And so we’re seeing a little bit of a slowdown because I think by sellers are keeping their prices high and buyers just are being more rational as they as they go through this.
Bill Dezellem
Great. Thank you both.
Operator
(Operator Instructions)
Tim Moore, EF Hutton.
Tim Moore
Banks now is great to see the gross margin EBITDA margin come in pretty impressively for the quarter despite the sales decline. So kudos on that cost savings and efficiency fronts. And I’m so I’m 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, you know, some of the earlier comments about the Class A. truck volume could be up to the peak in 2026 when you kind of look out to your sales capacity and then maybe let’s call it for $425 million to $475 million, do you think you’d could be starting to fill that towards the end of 2026 and get those customer qualifications.
And in terms in place by then, it seems like you’re destined for a rebound next year obviously on sales, but just trying to wrap my head around maybe when you’ll start to fill that capacity fully.
David Duvall
Yes. I think with some of the new wins that we have the [$25 million] that we talked about, and it’s probably somewhat conservative, but we’re looking at 2025 where we’ll start seeing that ramp up. The truck demand will start picking up pretty quick because the installed capacity and the product lines are already there.
And so we 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.
Tim Moore
Great. That’s helpful.
David Duvall
And I guess that’s why it was a little bit past that you have made it.
Tim Moore
And now it seems like that’s really going to give them very efficient additions and you can imagine going to be bumping up against at least 2026, ’27 on just one thing I want to kind of clarify. I know you talked about the Volvo program that one, it may maybe that one or two programs phasing out you mentioned in February. Are there any kind of additional sales ones or one-off of customers renewals, you know, over the next year? Is there anything else that could maybe online a little bit or be additive.
David Duvall
Of the wins that we just talked 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 were coming back, I think the challenge with the Volvo was that decision was actually made three years ago.
So but we have 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
Yes, great. 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 is that we’re actually big 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 comments 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 got to go win the business and there’s really no other major programs that we know of that deal or have been awarded away at this point or anything like that.
David Duvall
Yes, I think a lot of what we worked on was really getting the business model right being able to get our execution in place as far as our costs as well as what we talked about on the market market pricing. So I think preparing the organization and now looking at what we need to do to invest for to drive growth to have the peak of the season come in and not be ready for that. We’ve seen what that what that does in the past in 2018, ’19.
Tim Moore
And thanks for the color on the customer outlook and the visibility that you have there. That’s really helpful. And congratulations again on this being very good if you’re managing gross margin sequentially your guidance for the year. I appreciate that. Thanks.
John Zimmer
Thank Tim.
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 DeWalt for any closing remarks.
David Duvall
Both Thank you for your continued interest in our company will 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.
