Core Molding Technologies Inc

Good morning and welcome to the Core Molding Technologies first quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Sandy Martin of Investor Relations. Please go ahead.

Thank you and good morning, everyone. We appreciate you joining us for the Core Molding Technologies conference call to review first quarter results for 2022. Joining me on the call today are Core Molding's president and CEO, Dave Duvall, and the company's EVP and CFO, John Zimmer. This call is also being webcast and can be accessed through the audio link on the events and presentations page of the investor relations section at coremt.com. Today's 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 or forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature are uncertain and outside of the company's control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued today for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management may also refer to non-GAAP measures, including adjusted EBITDA. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. Core molding technologies assumes no obligation to publicly update or revise any forward-looking statements. Finally, the earnings press release we issued earlier today is posted on the investor relations section of our website at coremt.com. A copy of the release has also been included in an AK submitted to the SEC. And now I would like to turn the call over to the company's CEO, Dave Duvall. Dave?

Thank you, Sandy, and good morning, everyone. Let me start today's call by celebrating an accomplishment with our teams. We were recently notified of the Gallus Award nomination that recognizes core molding for Orbis' Supplier of the Month, and this is two months in a row. The nomination is provided by the Orbis plant teams to companies that have stepped up to take whatever actions are necessary to support the Orbis value proposition. This value proposition exemplifies a commitment to provide the highest level of quality, service, and on-time delivery with flawless execution. We are grateful and humbled by the nominations. I am proud of our team for their commitment to excellence in the field, especially given the challenging supply chain. During last quarter's call, John and I talked about implementing a much more proactive investor outreach program that started with our earnings conference call. Today, we're expanding on that by adding a questions and answers session at the end of our prepared remarks. We are pleased with your action from new and existing investors as we continue to create more dialogue and transparency with the investment community. Additionally, we have expanded our outreach to attend additional conferences and non-deal roadshows as part of our new ongoing strategy to share our business transformation and growth story. Our EVP of Human Resources, Renee Anderson, likes to remind me that when you think you've communicated enough, you need to do it 10 times more. I appreciate her coaching, and I believe I've learned from it. This is exactly why John and I are ramping up our investor and public communications. In the past, Core Molding was very much more a medium heavy-duty truck company with about 91% of our revenue coming from the transportation industry. Today, transportation represents less than 40% of our revenues. This is not because we reduced our revenue on truck, but a direct and purposeful result of our business transformation strategy to diversify our revenue into other markets that are either growing or still early in the conversion process of transitioning from traditional materials, to engineer materials to obtain the benefits of light weighting, design flexibility, strength to weight ratio, and corrosion resistance. I know we keep saying it, but we can never state it enough. The conversion from traditional materials to an engineered material is typically a significant change for a customer, which is why it is so important to have a technical solution sales approach to help the customer optimize the end solution for them and their end customers. It does require more upfront work, including design, development, and simulation, but it enables customers to create unique products and solutions that by the basic design of the engineered material performs better. The bottom line is that there is always a finite number of end products that will be purchased, but there is an almost unlimited demand for product improvements. I think it's exciting to be in a company where we can utilize the largest portfolio of processes, to optimize materials at their chemical and even molecular levels to create unique solutions that improve our infrastructure, environment, and society. This, to me, will have unlimited demand, no matter what changes we see in the market or society. So, back to the original question. Why change in communication? We want to share our transformation with the investor community because we know it's an exciting opportunity for growth and absolutely is a significant change in our business model. Today, I will discuss our continued progress on initiatives and touch on some highlights in our 2022 first quarter results. Then I'll turn the call over to John to review Q1 in more detail. Lastly, I will come back to wrap up the call and discuss our efforts around the company's important sustainability program at core. We continue to grow our relationship with large blue chip companies, like UFP Industries and the building products industry, Navistar, PACCAR, Volvo, serving the heavy-duty truck industry. We also have secured a major market share in the marine and land-powered sports industry with Yamaha and BRP in North America. Revenue growth and diversification are key components of our long-term strategy. And in the first quarter of 2022, we successfully added $10 million of net new wins. These net new wins will launch between 2022 and 2024, and are incremental to the $75 million of net new wins that we achieved last year. And we are beginning to generate incremental net sales this year from those net new wins. This new business further diversifies the company's revenue by expanding into growing markets like industrial, utilities, packaging, as well as power sports. The momentum from 2021 has carried into 2022, and we will continue to strategically diversify as we purposefully grow our business. We launched three new programs in the first quarter of 2022, and they are beginning to ramp up volumes. Working with our customers, we are on schedule to launch several additional programs in 2022, which were included in last year's net new wins. Additionally, the Ford Bronco roof program, which we won in 2020, is set to ramp up production in the second quarter this year, and we believe that demand will ramp up quickly for this product. Flawless launches of major programs require robust processes, disciplined execution, and a dedicated team. I appreciate and do not underestimate our team's level of effort, diligence, and hard work required to bring all of these new products to life. New business wins continue to be our primary growth driver. Our opportunity pipeline is robust at over $200 million. We are now to a point that in order to continue our revenue expansion, we need to add capacity. John will discuss later the change to our capital expenditure plan and the benefits from our new wins on our revenues in the first quarter. Turning now to our financial results, fiscal first quarter results were strong. We reported net sales of over $90 million. That's the highest quarterly sales ever for core molding. We grew adjusted EBITDA dollars with a double-digit adjusted EBITDA of 10.5%, which was our stated goal. Our continued focus to offset the impact of raw material inflation that began in 2021 resulted in better overall profitability, despite the dilutive impact to the gross margin percentage. We are seeing material and labor supply pressure stabilize, and customer demand continues to be strong. We recognize that the world and market continue to be challenging for all, and therefore monitor daily in customer demands. With that, I'll turn the call over to John Zimmer to further discuss our financial results.

Thank you, Dave, and good morning, everyone. First quarter of 2022 net sales totaled $90.6 million, up 24% versus a year ago, and product sales increased 30% versus the prior year period. Sales increases were largely driven by customer demand across all industries, new program sales, mainly from industrial and power sports customers, as well as raw material recoveries. Gross profit for the quarter was $14.5 million, or 16 percent of sales, compared to $12.7 million, or 17.5 percent of sales in the prior year first quarter. The decline in the first quarter margin percentage was primarily due to the impact of zero margin recoveries of higher raw material costs. Excluding this impact, first quarter 2022 gross margin would have been 17.7 percent, an improvement from the year-ago quarter. We have recovered a majority of the increased cost the company has incurred from the raw material inflation. However, we are still working with certain customers to obtain recovery. We expect to have all significant recovery agreements finalized by the end of the second quarter. Although we have seen improvement in supply chains, we continue to carefully monitor customer demand changes resulting from supply chain impacts. After adjusting for raw material recoveries, we were able to match profitability levels from last year's first quarter, even with broader inflationary headwinds from other cost categories like labor, supplies, and energy. Selling general and administrative expenses for the quarter were $8.5 million compared to $7.4 million in the prior year period. Higher wage costs due to investment in our technical solutions and advanced manufacturing engineering teams, additional professional fees related to information technology improvements and recruiting, and higher insurance costs due to premium inflation drove the SG&A increase. We also finalized a new four-year labor agreement in our Coburg facility. Now all of the company's labor agreements are finalized for 2022, which provides stability and assurance of uninterrupted supply for our customers. In the first quarter, the company reported solid operating income of $6 million, a year-over-year quarterly expansion from $5.3 million in 2021, and a sequential improvement from operating income that was $1.9 million in the fourth quarter of 2021. Fiscal 2022 first quarter net income aggregated $3.9 million, or 46 cents per share, compared to the 2021 first quarter net income of $3.5 million, or 41 cents per share. Adjusted EBITDA for the fiscal 2022 first quarter was $9.5 million, or 10.5% compared to $8.6 million for the prior year. You can find the gap to non-gap reconciliations of adjusted EBITDA financial measures at the end of today's press release. As we discussed in our last call, our revenue diversification strategy continues to progress with product revenue for the first quarter of 2022 consisting of 39 percent truck, 23 percent power sports, 17 percent building products, 7 percent industrials and utilities, and 14 percent from all other categories. Turning now to the company's financial position, cash flow and balance sheet. The company's cash used by operating activities totaled $1.7 million for the first three months ended March 31, 2022, and capital expenditures for the same period were $2.5 million. The first quarter negative working capital is actually a positive signal of growth for us with uses of cash that include higher accounts receivable and inventory. An approximate 32% increase in product revenues from the fourth quarter of 2021 drove the growth in accounts receivable. On the last call, we guided capital spending in 2022 in the range of $14 to $16 million, inclusive of the $2.2 million to complete the capacity expansion of the direct long fiber thermoplastic expansion in our Mexico plant. We expect this large press to be operational in the second quarter. Since then, our recent evaluation of existing plant space, coupled with the continued sales momentum in 2022, influenced us to request board approval for $5 million of additional capital spending for 2022 with a full year capital expenditure budget of approximately $20 million. This will allow us to maximize our current footprint and add capacity by purchasing three new presses, which should be revenue generating immediately upon installation. Notably, we are also installing robotic and automated systems on three of our presses, which will result in higher throughputs and efficiencies with less reliance on labor. At March 31st, 2022, the company had total liquidity of $20.8 million, consisting of $1.3 million of cash and $19.5 million of availability under our revolving credit facility. The company had term debt of $24.2 million at year end. As of the end of the quarter, our term debt to trailing 12-month EBITDA ratio was less than one times adjusted EBITDA. An important metric used by our company is return on capital employed, which is a pre-tax return metric. For the first quarter, the return was 4.5%, or approximately 18% on an annualized basis, which is in line with our long-term goal. We believe that our strong balance sheet and ample liquidity provides us with the flexibility, resiliency, and growth in 2022. Given our successful completion of our business transformation from a few years back, we remain focused on and believe in core strengths strategic growth prospects in 2022 and beyond, and we remain committed to grow long-term shareholder value. With that, I'd like to return the call to Dave.

Thank you, John. As John discussed, we are pleased with our first quarter results and with customer demand that continues to expand our opportunity pipeline to over $200 million. Our company has worked hard to be a good corporate citizen that recognizes our social responsibility and and commitment to our employees and the communities in which we live and work. In addition to social health, safety, and human rights policies, we are committed to the environmental sustainability that focuses on the efficient use of energy and raw materials, as well as waste minimization and risk prevention. Our material development team continues to research the use of organic and renewable materials We have also appointed a dedicated leader of our sustainability efforts at CORE to lead and optimize our efforts in this somewhat unclear period that all of us are experiencing. In our thermoplastics product line, we strive to use recycled material as an alternative to virgin materials, stressing our desire to convert waste into usable products. Simply stated, our goal is to exceed the needs of the present while helping to make the world a better place for the future. We also have some interesting research projects underway that I'll discuss on future calls. One involves reversing coral reef damage in the ocean caused by lionfish. Meaningful work and research is underway, so we will share more information in future quarters. We remain laser focused on continuing to execute our long-term strategic plans, and we are well positioned for continued growth. We are no longer a truck supplier. although we still very much appreciate our business and partnerships in the heavy truck industry. Our technical solution sales are winning in new industries, and we continue to invest in our people, engineering capabilities, automation, and assets as we drive to improve every single day. We will also continue to invest in our ability to innovate and provide technical solutions and provide conversions that result in lighter weight, lower costs, and higher performance products for our customers. We are concentrating on new industries, especially in the industrial and utility sector, as more people, and I quote this, work where they want to live, in both suburban and rural settings where improved infrastructure is needed. We know that decision makers of critical infrastructure investments will be evaluating products and processes, and our engineering material solutions are supporting these customers by reducing the insulation costs, and converting traditional materials to a lighter weight, more durable composite solution. Our low-cost, lightweight, and durable substitutions with our technical solutions teams are ready for rapid deployment into new infrastructure projects. We believe the continued execution of our long-term strategic goals will position a company for further stability and profitable growth in the future. We see a bright future ahead for core molding technologies, and we are excited to continue growing the company and delivering value for our shareholders and stakeholders. With that, I'd like to open a call to questions from analysts or investors. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. All right, our first question comes from JP Gagan from Global Value Investment Corp. Please go ahead.

Congratulations on an excellent print. It seems like you've come a long way over the past few years.

Certainly.

You talked about labor, energy, and other cost pressures, but it seems like your recoveries have only related so far to material costs. Can you elaborate on the other cost pressures that you're experiencing and if there's an opportunity to recover any of those cost increases?

Yeah. So, you know, JP, So the recoveries we primarily focus on has always been the raw materials because from a size situation, there are much larger increases than the other areas. But we are, like everybody, seeing inflation in labor, energy, gas, natural gas prices are going up, you know, supplies, and anything that has anything to do with freight, you know, from a standpoint of getting to our building, we're seeing a little bit there in everything. You know, we, as we've been working with our customers, we have been, you know, looking at those situations where our overheads and our labor has been going up and we've been passing some of that through. We do see that, you know, it's our responsibility also to try to control those costs. Our goal isn't to take everything and pass it through to our customers. It's really to try to control those costs, find efficiencies, still look for, you know, alternate supplies, alternate sources. And so that's always our first choice is to try to figure out how to, you know, minimize the cost. But, you know, we do work with customers and different customers we've had, you know, we've had been able to pass through some of the overheads and labor. But the material cost is definitely still the significant portion of our raw material inflation that we've seen.

Okay, that's helpful. Thank you. Obviously, supply chain issues are affecting all sorts of producers across all sorts of businesses. It strikes me that your customers might be more affected than your business in particular has been by supply chain issues. Can you provide any additional color around that and what we might expect as these issues resolve and demand begins to normalize?

Yeah, I think from our side, relative to our supply base, we see a lot of it stabilizing. I think we've done a lot of work with the supply base as well as what we had to do with inventories, changing our component mix as well. So we're seeing that much behind us. We do see some challenges, more of an intermittent supply chain challenges in some of our larger customers. Their supply chains are significantly more complex than ours, so the probability is that they'll have some challenges at least for the near future. But, you know, they'll have a challenge, but they still want to catch up. What we're seeing is the demand is there in a rush to meet the demand.

Got it. Thanks. Turning to your capital structure, you've obviously made some substantial improvements over the past several quarters or years, but it strikes me that there might be room for additional improvements or to set another way lower your cost of capital, particularly your debt capital. Can you provide some color around how we would expect the capital structure to develop over the coming quarters?

Yeah, so we are working on that right now. You know, we started the process probably about nine months ago of looking at how to, you know, restructure our debt. You know, and we had the third quarter, which was a little bit of a challenge, and so we kind of held off. And now that we, you know, have a good, you know, couple quarters again behind us, We are in the final negotiations with restructuring the debt. We looked at overall lowering the cost and then being able to fix some of the cost also when we get that done. We would hope to have that done probably by the end of the second quarter, maybe the start of the third quarter at the latest, but we're actively working on that right now.

Okay. And then finally for me, you previously stated that acquisition is likely a part of your growth strategy, particularly as you diversify into various end markets. Can you provide any sort of commentary around where you stand in evaluating potential acquisitions and what we would expect in terms of characteristics of an acquisition target?

Yeah, I mean, it's absolutely part of our strategy. We know moving forward, right now when we're Getting 75 million in net new wins last year, 10 already in the first quarter. Right now, our focus is on gaining the organic growth that we're seeing out there and really installing the capacity and locations in our plants that are already set up for those machines being the least expensive option on growing the business. Acquisitions we see is something a little further out when we're looking at where we need to install the capacity and then adding to our overall strategy and value proposition. whether that's either different processes or technologies or knowledge to help us with the technical solution sales. Right now, we have a lot of opportunities that we're acting on today.

Yep, makes sense. All right, that's it for me. I appreciate the additional color, and congratulations again.

Thank you. Thanks, JP.

The next question comes from Justin Putnam from the Talanta Investment Group. Please go ahead.

Good morning. My question is, as you look out over the next several years and continue with this transition in the business, how much of an anomaly is the current level of capital expenditures you're expecting for this year?

Again, Justin, I think the way we look at it is I don't think it's an anomaly. I think where we would be looking at it is our maintenance capex is usually going to be somewhere around probably 3% of sales. We'll flex those up and flex those down, those things that we need to just make sure we're doing. So as we grow the company, if we can get to our targets of continuing to grow the revenue, there is going to be the maintenance capex that will continue to grow kind of in line with revenues. You know, as Dave mentioned, and I mentioned in mine, I think we've kind of always, you know, put out there that, you know, a couple years ago we were at $200 million, $210 million. You know, we kind of last year hit $307 million just at a $90 million quarter. And what we're seeing is to really go to that next level, we are going to strategically have to add capacity, primarily presses, you know, maybe some brick and mortar at some point as we, you know, kind of grow the facility. So I would see that CapEx only be needed as we grow the company. You know, as we go to that next level of revenues, $400 million and above, I think we would, you know, continue to add capacity strategically in order to continue to grow the company. I don't know that I'd call it abnormal, but I would call it part of the growth strategy of us getting to that next level. We are going to definitely have to add presses and automation and those things as we go forward.

Okay, great. Thank you.

The next question comes from Chip Moore from EF Hutton. Please go ahead.

Hey, good morning. Thanks for taking the question. I wanted to follow up there, I guess, on you know, investing to meet the strong organic demand, just the three new presses that you're investing in, sort of timeline there, how to think about that, and then can you delve a little bit deeper on the automation efforts? I think you said it was on three presses, you know, what that will give you sort of on throughput and cost and potential maybe to roll out more automation throughout the business.

Yeah, the three new presses will be going in place. They'll be installed this year. One of them is, well, they were all used, but one of them is already in operation. We're moving that over and automating. And then we have two other presses that were not in operation that we're refurbishing and putting in place in locations that already exist. But as you said, pretty exciting being able to implement the full automation. We'll fully automate load and unload on presses. Obviously, there's a lot of challenges with getting direct labor in specific regions of the U.S., but really about improving the throughput, the speed, and getting more out of our assets at the press itself.

Maybe one more just on the opportunity pipeline. I think you said greater than $200 million. You said that before. Should we think about that as a similar mix

uh to the current business in terms of end market or um you know does it skew a certain way and give you more diversification maybe you know industrial utility for example yeah it would if you were to rate it as far as the percentage of current sales to future sales it would definitely be weighted more towards the strategic direction um just because it's more front loaded on ahead of the strategy more of a leading indicator So we're seeing more in areas where we're purposefully going after the business, industrial utilities, agricultural. So we're seeing a lot more in that area. Got it. Because that's where we're focusing, right? Yep.

Again, if you have a question, please press star, then 1. There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Dave Duvall for any closing remarks.

I'd like to thank everyone and thank you for continued interest in our company. We look forward to providing an update of our progress when we report our second quarter results in August. Thank you very much from the entire team.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.