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Edited Transcript of EML earnings conference call or presentation 8-Nov-19 2:00pm GMT

Q3 2019 Eastern Co Earnings Call NAUGATUCK Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Eastern Co earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * August M. Vlak The Eastern Company - President, CEO & Director * Christopher Moulton The Eastern Company - Head of Corporate Development & IR * John L. Sullivan The Eastern Company - VP & CFO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Eastern Company's Third Quarter Fiscal Year 2019 Earnings Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to Chris Moulton, Head of Corporate Development and Investor Relations. Sir, the floor is yours. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [2] -------------------------------------------------------------------------------- Thank you. Good morning and thank you, everyone, for joining us. Speaking today will be Eastern's President and CEO, Gus Vlak; and our CFO, John Sullivan. After that, we'll open the call for questions. Please note that some of the information you will hear during our discussion today 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 expense, taxes and the 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. For more information regarding these risks and uncertainties, please refer to risk factors discussed in our Form 10-Q filed yesterday and also in our most recent 10-K. With that, I'll turn the call over to Gus for opening remarks. -------------------------------------------------------------------------------- August M. Vlak, The Eastern Company - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Chris, and good morning to those of you who have joined us on the phone and those participating via the web. I'll start this morning with an overview of our sales and earnings for the third quarter and then update you on our recent acquisition of Big 3 Precision. Adding this leading provider of engineered turnkey packaging to our portfolio of businesses was a significant step forward for us. After that, I'll take a few minutes to talk about some of the new products our businesses have recently launched. Together, they provide a good illustration of the approach we're taking to respond to our customers' needs, bring new technologies and materials to market and ensure the vitality of our businesses. So looking at the financial results. Net sales for the quarter were $60.7 million. That's an increase of almost 6% from the 2018 period. Our growth was led by the Industrial Hardware segment, which includes 1 month of Big 3 Precision results, partly offset by some of the softness in several end markets. In addition, we realized growth through new product launches with Class 8 truck customers and continued -- and experienced continued strength in commercial transportation markets. On the bottom line, our results were solid with an increase of more than 11% to $0.67 per diluted share, reflecting both revenue growth, our continued focus on productivity and our successful pass-through of the record trade tariffs that we paid to the U.S. government in the third quarter. Third quarter earnings also include a onetime nonrecurring transaction cost of approximately $800,000 or roughly $0.13 per diluted share. This double-digit increase demonstrates the power of our business model and our focus on investing in areas that offer long-term growth opportunities. Now turning to Big 3 Precision. As you know, during the past several years, we've established a track record of successful acquisitions. Still, the size and strategic significance of this transaction really sets it apart. I discussed many of those attributes on our conference call in September, but I just want to highlight a few of them again today. First, we acquired a business that generated approximately $72 million in revenue for the first 12 months ended June 30, 2019. Second, we added scale and expanded our presence with several of our key customers in leading niche industrial markets. Third, we took a big step towards our goal of generating $100 million in EBITDA, a number which we believe reflects our commitment to creating long-term shareholder value. And finally, Big 3 Precision offers an especially attractive opportunity for us to create value, both through organic growth and through further bolt-on acquisitions. When we announced the acquisition, I mentioned that we expected it to be accretive to Eastern's earnings for fiscal 2020. Big 3's performance in the past quarter has reinforced that expectation. In fact, we now anticipate, not including transaction expenses, it'll be accretive to our full year 2019 results. Over the past few months, we focused on integrating Big 3 Precision, and I'm very happy to say that, that process has been proceeding very smoothly. We've met with nearly all the team members at the company's main locations, talked about our values, expectations and our commitment to the business. We continue to be impressed with the quality of the company's leadership and workforce as well as the scope and strength of its customer relationships. We're also very pleased with the way Big 3 Precision has added to our overall backlog, which remains robust through the end of 2019. Now let's talk briefly about some of the new products we launched during the past several months. As you know, one of our principal goals is to provide highly engineered value-added solutions. And in the third quarter, new products grew by 6%. That's an important measure of our vitality. To illustrate how we're expanding and enhancing our offerings, I'll run through a few examples of products that we've recently launched. In the third quarter, our Eberhard Manufacturing business launched its new evolution Whale Tail latch and lock, which is a lighter weight version of our original Whale Tail latch with a composite, cover, and it serves manufacturers of truck storage and enclosure products. Eberhard also secured a new rotary system for truck chassis fairing, which allows for easy release of fairings on the bottom of trailers for repairs and service. This product will be offered by a leading Class 8 truck manufacturer starting early next year. And finally, our Illinois Lock business launched several products, including a new tonneau cover handle, which is based on the technology from Load N Lock, which we acquired in 2018. The new handle is easily upgradable from an existing mechanical to an electronic model and is made from an automotive composite that allows for better detailing and a closer match to truck body styling. In summary, the past quarter was successful for Eastern. In addition to sales and earnings growth, we generated approximately $3.5 million in cash from operations, adding further strength to our balance sheet. Our solid financial results, the acquisition of Big 3 Precision and the launch of a range of new products, all support our strategy generating positive long-term results for our shareholders by continuously optimizing our portfolio of businesses, improving execution and building our balance sheet. With those comments, I'll turn it over to John to walk us through the results of the quarter. John? -------------------------------------------------------------------------------- John L. Sullivan, The Eastern Company - VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Gus. On a consolidated basis, net sales in the third quarter of 2019 increased 6% to $60.7 million as compared to $57.4 million in the third quarter of 2018. The increase in net sales was driven by continued strength in the Industrial Hardware and Metal Products segments, offset by a decline in net sales in the Security Products segment. Total sales volume in the third quarter of 2019 decreased by 2% due to a decline in sales volume in the Security Products segment, a decline in the recreational vehicle market and a decline in our Composite Panel business, which more than offset the addition of 1 month sales related to the acquisition of Big 3 Precision. New products contributed 6% to the quarter sales increase. New product sales included a hood mount truck mirror, a molded toolbox latching system for pickup trucks, an electronic switch lock, a key lock for storage industry, a canopy lock assembly for vehicles and various industrial castings for the agricultural market. On a segment level basis, net sales in the Industrial hardware segment increased by 15% in the third quarter of 2019 as compared to the net sales in the third quarter of 2018 as a result of strong sales growth in Class 8 truck distribution and specialty vehicle markets in addition to the acquisition of Big 3 Precision. Net sales decreased in the Security Products segment by 16% in the third quarter of 2019 as compared to the net sales in the third quarter of 2018. Sales from the Load N Lock business we acquired in June of 2018 partially offset the impact of the lower demand for commercial laundry products, a decline in our point-of-sale security products, the termination of a supply contract to manufacture electronic padlock systems for cellphone tower security access applications and the loss of a customer service in the recreational vehicle market. Net sales increased in the Metal Products segment by 14% in the third quarter of 2019 as compared to the net sales in the third quarter of 2018 as a result of a 20% increase in sales of mining product customers and an increase of 3% in sales to industrial casting customers compared to the third quarter of 2018. On a consolidated basis, gross margin as a percent of sales was 25% in both the third quarter of 2019 and the third quarter of 2018. Cost of products sold in the third quarter of 2019 increased by $2.6 million or 6% as compared to the third quarter of 2018. The increase in cost of products sold for the third quarter of 2019 reflects the mix of the products being sold, increased costs due to additional sales volume and costs incurred in producing a new Class 8 truck mirror that was awarded in 2018. The increase in cost of products sold in the third quarter of 2019 was partially offset by declining raw material prices by 13% for hot rolled steel, 3% for cold rolled steel, 24% for scrap iron, 5% for copper and 18% for zinc as compared to the third quarter of 2018. We experienced $0.9 million in tariff-related costs on China-sourced products in the third quarter of 2019 that were not incurred in the prior year period, the majority of which has been recovered in price increase. Product development expenses decreased by $1.2 million or 59% in the third quarter of 2019 as compared to third quarter of 2018. The majority of the decrease relates to the closure of the Velvac Road-iQ development operations in the second quarter of 2019. Selling and administrative expenses increased by $0.9 million or 12% in the third quarter of 2019 compared to the 2018 period, primarily as a result of an increase in payroll and payroll-related expenses, acquisition expenses of $0.8 million and increased amortization expenses related to the acquisition of Big 3 Precision. Net income for the third quarter of 2019 increased 11% to $4.2 million or $0.67 per diluted share from $3.8 million or $0.60 per diluted share for the 2018 period. We generated approximately $12.2 million in operating cash flow during the first 9 months of 2019 as compared to approximately $7.1 million during the same period in 2018. We allocated $9.5 million of the cash towards the pay-down of our long-term debt, of which $8 million was on an accelerated payment. We subsequently entered into a new credit arrangement that refinanced the outstanding $19.1 million in principal and provided $81 million for the acquisition of Big 3 Precision during the third quarter of 2019. During 2019, we repatriated $0.7 million from our Canadian operations, $1.5 million from our Chinese operations, $0.5 million from our Mexican operations. We subsequently repatriated an additional $1 million from our Chinese operations in the fourth quarter of 2019. Cash flow from operations, coupled with new credit agreement, were sufficient to acquire Big 3 Precision, cover related expenses and to fund capital expenditures, debt service and dividend payments. Addition to property, plants and equipment were approximately $1.9 million for the first 9 months of 2019 compared to $4.2 million for the 2018 period. As of September 28, 2019, there was approximately $0.3 million in outstanding commitments for capital expenditures. I'll turn the call back over to Chris for M&A questions. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [5] -------------------------------------------------------------------------------- Thank you, John. Operator, we'd now like to open the call for questions. By chance, do we have any telephone participants? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [2] -------------------------------------------------------------------------------- Yes. While we wait, we do have a few questions that have come in via the webcast. So let's tackle those first. One, there's been commentary lately about the possibility of an economic slowdown, if not a recession. How do you expect Eastern's portfolio of businesses to perform under these economic conditions? -------------------------------------------------------------------------------- August M. Vlak, The Eastern Company - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you. Well, a lot of our products ultimately support a very wide scope of economic activity, including commercial transportation, oil and gas, construction. And of course, at the end of the line, consumer ultimately drives a lot of fundamental demand. Given how our products are used and the broad range of markets that we support, we're less exposed to any one shock and more impacted by overall economic activity and that would affect our demand. Having said that, we fight hard to grow share, launch more competitive products and rigorously control costs in these economic conditions. We're trying to continue to work hard to deliver earnings growth no matter what conditions we operate in. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [4] -------------------------------------------------------------------------------- All right, operator, by chance, do we have any telephone participants for questions? -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- It doesn't look like we have any questions coming in. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [6] -------------------------------------------------------------------------------- Okay. We do have a couple more questions on the webcast. Second question, in your September call, you said you expected Big 3 Precision to be accretive to your EPS by at least $0.40 for fiscal 2020. Is that still the case? Or do you now expect it to be even higher? -------------------------------------------------------------------------------- August M. Vlak, The Eastern Company - President, CEO & Director [7] -------------------------------------------------------------------------------- We do expect the acquisition to be accretive to 2020 EPS by at least $0.40, and we are confident in that number, and we're working hard to try to beat that number. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [8] -------------------------------------------------------------------------------- All right. We have another webcast question. Having completed the acquisition of Big 3 Precision, are you planning to target a similarly sized transaction over the next 12 months? Or do you think it would be better to digest Big 3 before looking for next acquisition candidate? -------------------------------------------------------------------------------- August M. Vlak, The Eastern Company - President, CEO & Director [9] -------------------------------------------------------------------------------- So we believe that Big 3 Precision offers an especially attractive opportunity for us to create value, both through organic growth and through bolt-on acquisitions. And that's really where we are currently focusing. -------------------------------------------------------------------------------- John L. Sullivan, The Eastern Company - VP & CFO [10] -------------------------------------------------------------------------------- Operator, by chance, do we have any other questions or -- on the telephone? -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- (Operator Instructions) -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [12] -------------------------------------------------------------------------------- Okay. We do have another webcast question. Can we expect that the nonrecurring expenses, which were $3.8 million, will not expand into the fourth quarter? Have all the write-offs been taken? Or can we expect 0 nonrecurring expenses to be over? And then the second part, what was the reduction in debt in the fourth quarter? Third quarter, I believe, that's... -------------------------------------------------------------------------------- John L. Sullivan, The Eastern Company - VP & CFO [13] -------------------------------------------------------------------------------- Well, as far as the nonrecurring from the write-offs that we incurred in the second quarter and third quarter, those are over with. We don't anticipate any further write-offs. There are probably a few more acquisition-related expenses trickling in on that we expect to come into the fourth quarter, but minimal. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [14] -------------------------------------------------------------------------------- Then reduction, debt reduction in the, I believe, third quarter. -------------------------------------------------------------------------------- John L. Sullivan, The Eastern Company - VP & CFO [15] -------------------------------------------------------------------------------- I'm not quite sure what that means. I mean we did pay off debt of approximately $9 million last year or during the year. $8 million was on an accelerated basis. And then in the third quarter, with the acquisition of Big 3 Precision, we refinanced our entire debt and -- to pay for the acquisition of $81 million and to refinance about $19 million that was outstanding on our previous debt. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [16] -------------------------------------------------------------------------------- All right. And then we have another question. Will Big 3 Precision to be accretive in the fourth quarter after expenses? -------------------------------------------------------------------------------- August M. Vlak, The Eastern Company - President, CEO & Director [17] -------------------------------------------------------------------------------- Yes, it will be. We haven't quite determined how much, but we believe that it's on track to be accretive in the fourth quarter. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [18] -------------------------------------------------------------------------------- Then we have one other question. Which of your companies are you particularly excited about in terms of future new prospects and new customers? -------------------------------------------------------------------------------- August M. Vlak, The Eastern Company - President, CEO & Director [19] -------------------------------------------------------------------------------- So we believe each of our companies has opportunities and -- as part of our portfolio. I believe there are a couple of companies that are very well positioned and which have a pretty good line of sight into opportunities. Our Class 8 truck mirror business has been growing very rapidly in the last year and is well positioned to continue to expand its business over the next couple of years. Even -- while that market -- overall demand in that market is declining, we think that business is well positioned to grow pretty significantly in the foreseeable future. We also think that some of the businesses that we've been trying to reposition like Illinois Lock is what is -- entering higher growth markets, which we think positions it well for accelerated growth in the future. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [20] -------------------------------------------------------------------------------- All right. Operator, do we have any callers via telephone? -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- There are no live questions. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [22] -------------------------------------------------------------------------------- Okay. And it looks as though we have no further questions via webcast. So I will turn the call over to Gus for closing remarks. -------------------------------------------------------------------------------- August M. Vlak, The Eastern Company - President, CEO & Director [23] -------------------------------------------------------------------------------- Thanks. Thanks, Chris, and thanks, everyone, for joining us this morning. As you've heard, we're carefully following our road map to increase shareholder value by optimizing our portfolio of businesses, strengthening our execution and keeping our balance sheet strong. Before wrapping up, I want to mention that we'll be participating in the ROTH Capital's Technology & New Industrials conference in New York next Wednesday. We'll issue an advisory announcement with details later today, and I look forward to seeing some of you guys there. Thank you, and we hope you will join us again next quarter to review the results of the fourth quarter of fiscal year 2019. -------------------------------------------------------------------------------- Christopher Moulton, The Eastern Company - Head of Corporate Development & IR [24] -------------------------------------------------------------------------------- With that, operator, we'll now turn the call back to you. Thank you. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day.