The Eastern Company (NASDAQ:EML) Q4 2023 Earnings Call Transcript

The Eastern Company (NASDAQ:EML) Q4 2023 Earnings Call Transcript March 13, 2024

The Eastern Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. And welcome to The Eastern Company’s Fourth Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Ernie Hawkins. Sir, you may begin.

Ernie Hawkins: Thank you. Good morning. And thank you everyone for joining us this morning for a review of Eastern’s results for the fourth quarter and full year of 2023. With me on the call are Eastern’s President and CEO, Mark Hernandez; and Eastern’s CFO, Nicholas Vlahos. We 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, www.easterncompany.com, 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 in these forward-looking statements. 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 risk factors discussed in our SEC filings including Form 10-K filed with the SEC on March 12, 2024, for the fiscal year 2023. 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 an 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 will turn the call over to Mark.

Mark Hernandez: Thank you, Ernie. Good morning to those who joined us by phone and those participating via the web. It’s an absolute pleasure to be speaking with you today after a year of realignment and continuous improvement during which we focused on our core operations for long-term growth and shareholder value creation. As you know, since I became CEO in January 2023, we’ve been following four fundamental strategies; disciplined operations, effective capital utilization, focused commercial business and value adding acquisitions. To those four pillars, we recently added a key overlying component we call One Eastern to help us capture the many synergies that exist between our three business operations. During 2023, our determined application of Eastern strategies produced increasingly strong results as 2023 progressed.

See also 13 Most Undervalued EV Stocks To Buy According To Analysts and 13 Most Undervalued Blue Chip Stocks To Buy According To Analysts.

Q&A Session

For the full year, we boosted our gross margins by 280 basis points from 21% in 2022 to 23.8% in 2023 through on shoring, pricing increases and cost recovery actions. Earnings from operations improved continuously each quarter, culminating in earnings per share of $0.57 in the fourth quarter of 2023 compared to $0.03 in last year’s period. We achieved these results while dealing with the lingering impacts of troubled supply chains with customers reducing their inventory levels as global supply chain finally returned to its pre-pandemic state and with high inflation that hadn’t been experienced for several decades. In addition to improving quality and consistency of our earnings, we brought down past due deliveries and past due order backlog.

And we ended the year with working capital as a percentage of sales of 25.6% compared to 26.1% in 2022. By reducing working capital requirements and generating cash flow from continuing operations, we brought down debt by more than $20 million. Cash flow from operations improved to $26.5 million in 2023 compared to $7.4 million last year and our balance sheet strengthened commensurate. While achieving these results, we continued investing in our company and returning capital to shareholders. During 2023, we streamlined Eastern operations, consolidating our focus on North America and in an example of vertical integration, we bought certain assets of SureFlex Incorporated to expand Velvac production capabilities. We also maintained Eastern’s long standing dividend program and repurchased 40,000 shares or approximately 0.6% of the company stock.

In 2023, our transformation strategy delivered strong early results and we expect to drive further improvements in 2024. We now have a solid operational foundation. We need to consider revenue enhancing acquisitions that will help Eastern grow and vertical integration initiatives that will support gross margin improvements. Before I outline our approach for this year, I’ll turn the call over to Nick for a quick review of the fourth quarter 2023 financial results. Nick?

Nicholas Vlahos : Thank you, Mark, and good morning, everyone. As Mark said, I’ll run through our financial results for the fourth quarter of 2023. For the period, net sales decreased 3% to $67 million from $69.1 million in the 2022 period, primarily due to lower demand for truck accessories and returnable transport packaging products amidst the normalization of the global supply chain. In the fourth quarter, we strengthened our backlog as a whole while at the same time reducing our past due backlog. Our backlog as of December 30, 2023 increased 10.5% to $80 million from $72.5 million on December 31, 2022, reflecting an increase at Big 3 for mold services and returnable packaging, an increase related to the launch of a new mirror program for Class 8 trucks at Velvac.

Gross margin as a percentage of sales in the fourth quarter was 26.8% compared to 16.6% in the 2022 period. The increase in margin primarily reflects lower material and freight costs, improved pricing and a favorable adjustment to the life of reserve in the fourth quarter of 2023 combined with other inventory write offs in the 2022 period. As a percentage of net sales, product development expenses were 2% compared to 1.5% for last year’s fourth quarter. Selling and administrative expenses increased $1.9 million or 19.9% for the fourth quarter of 2023. The increase was primarily due to higher payroll and payroll related expenses, legal and professional and selling costs. Other income and expense in the fourth quarter of 2023 decreased $3.2 million compared to the 2022 period.

The decrease primarily reflected an unfavorable $1.1 million pension adjustment and various other items. Net income for the fourth quarter of 2023 increased to $3.5 million or $0.56 per diluted share from $0.2 million or $0.03 per diluted share in the 2022 period. In the fourth quarter of 2022, net income was negatively impacted by restructuring costs of $0.5 million net of tax related to a warehouse consolidation into Eberhard. Adjusted EBITDA for continuing operations, a non-GAAP measure for the fourth quarter of 2023 was $7.2 million compared to $3.3 million for the fourth quarter of 2022. In 2023, we increased our cash flow from operations by $19 million when compared to 2022. The improvement reflects a reduction in cash used to support working capital, primarily a $5.3 million decrease in inventory.

In 2023, we reduced our accounts receivable days to 48 days from 56 days in 2022. By comparison, last year cash was primarily used to ensure the availability of inventory to meet customer demand in light of the supply chain constraints. With this cash flow, we paid down $5 million of debt during the fourth quarter and $20 million for the full year. This is a record level of debt paydown for Eastern. At the end of the fourth quarter, our senior net leverage ratio was 1.41 to 1, down from 2.27 at the end of 2022. In addition, we invested $6.4 million in capital expenditures and paid dividends of $2.8 million in 2023. That completes my financial review. I’ll now turn the call back to Mark.

Mark Hernandez: Thanks, Nick. At this point, I’ll turn to our plans for 2024 and beyond. First and foremost, we are going to continue to focus on delivering consistent performance through our proven strategy of disciplined operations, effective capital utilization, focused commercial business and value added acquisitions, all under the umbrella of One Eastern. The difference between today and our fourth quarter call last year and it’s important one, is that we now have a solid foundation of reliable earnings from operating activities to build on. The foundation positions us to continue driving earnings and cash flow, paying down debt and as I mentioned earlier to seriously considering and pursuing M&A opportunities that accelerate our objectives, while continuing to focus on vertical integration to drive margin increases.

In 2024, we expect our goals to be aligned, aided by continued strong sales demand in the automotive and commercial vehicle markets. Organic growth activities through new products and market share improvement as well as acquisitions. Our confidence is supported by our $7.6 million increase in backlog as of year-end 2023 to $80.1 million. This increase took place even as the global supply chain normalized. Customers cut back on excess inventory and we reduced our past due backlog. It is a strong indication of the new orders we’re generating, including Velvac’s launch of the new mirror program for Class 8 trucks and for Big 3’s mold services and returnable packaging. We have many initiatives underway to enhance our gross margins even further through reductions in product cost, concentrating on total landed cost through our vertical integration make versus buy strategies and spending rationalization efforts.