Core Molding Technologies Inc

Good morning, everyone. Welcome to the CORE Molding Technologies second quarter fiscal 2024 financial results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. Now I will turn the call over to Sandy Martin, three part advisors. Please go ahead.

Thank you and good morning, everyone. We appreciate you joining us for the CORE Molding Technologies conference call to review second quarter results for 2024. Joining me on the call today are the company's president and CEO, Dave Duvall and EVP and CFO, John Zimmer. This call is being webcast and can be accessed through coremt.com via an audio link on the investor relations events and presentations page. Today's conference call, including the Q and A session will be recorded. Please be advised that anytime sensitive information may no longer be accurate as of the date of any replay or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements or expectations or future events or future financial performance are forward looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward looking statements are uncertain and outside of the company's control. Actual results may differ materially from 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 in 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-GAP measures, including adjusted EPS, adjusted EBITDA, debt to trailing 12 months EBITDA ratio, free cash flow and return on capital employed. Reconciliation to the nearest GAP measures can be found at the end of our earnings release. Finally, this release has been submitted to the SEC on a form 8K. Now I would like to turn the call over to the company's president and CEO, Dave Duvall.

Thank you, Sandy, and thank you all for joining to review our 2024 second quarter results. I wanna start today with some important achievements by the core molding team in the first half of 2024. We were recognized this year with the 2023 PACR 10 PPM Quality Award. This is in addition to the 2023 BRP Gold Supplier Award we discussed last quarter. PACR awards this to suppliers that achieve and sustain exceptional quality. We are pleased with this exemplary quality performance achievement of less than 10 defects for every million final assembly shipped. This demonstrates our commitment and understanding of what our large OEM customers require in a supplier partner. In addition to high quality standards, we maintain strong customer partnerships through excellence in customer service and continuous improvement processes. Operational excellence is a continuous journey and is a mindset that we purposefully strive to embed in our culture. It is part of who core molding is as an organization. We have made significant improvements on our operational performance and continue to invest in our operational systems, both in growing skills and improving processes. It is never complete, but our focus is always safety, people, quality delivery costs in that order. In late 2018, we began implementation of our strategic transformation plan to create an inspiring and engaging culture, robust business systems, and execute a strategy pillars to enable growth. Our first two priorities were on creating a winning culture, which to me means engaged, empowered, and skilled team, and implementing robust and transparent business systems within which we operate. This includes purposely developing our organizational capabilities, engagement systems with transparency of business objectives, operational infrastructure, and financial discipline as a platform to grow both organically and inorganically. This multi-year transformation plan also involved in an aggressive revenue diversification program, which strategically shift us from being solely a truck supplier to a much more diverse business. Our goal is to create flow in everything we do by enabling a culture that embraces challenges and drives to make it easy for the customer, or more specifically, make the hard things easy to do. Technical solution sales and operational teams now support highly differentiated material conversions, proprietary processes, and uniquely designed and manufactured products that continue to drive further market penetration into our focused end markets. In 2024, we are focused on strategically investing and accelerated growth to specifically leverage the business we've created. Everything we've been doing was to enable and support the growth of our company, both in revenue and organizational capability. We will discuss this initiative and our lead generation campaign in more detail in a moment. Turning to a summary of the second quarter's financial results, going into this year, we signaled that 2024 sales expectations would be below 2023. Today, we reported the second quarter with 88.7 million in sales, down .2% compared to the second quarter of 2023, primarily due to end market headwinds that we will discuss in detail. When looking at sales sequentially, compared to the first quarter of 2024, net sales for the second quarter increased 13.6%. Gross margin for the 2024 second quarter was 20%, compared to 17% in the first quarter, and up 520 basis points from .8% in the fourth quarter of 2023. Anticipating the current demand environment, we proactively rebalanced our cost structure to minimize lower fixed cost leverage. We also generated 11.6 million in adjusted EBITDA, or 13% of sales, which improved over the first quarter's EBITDA margin of 11.2%. We generated solid free cash flows of over 16 million in the first half of fiscal 2024. The business execution improvements we introduced over the last 18 months allow us to generate higher cash flows on fewer sales dollars with greater stability and consistency. Now I turn the call over to John to cover the financials in more detail.

Thank you, Dave, and good morning, everyone. As Dave mentioned, our total net sales for the first quarter were $88.7 million, down .2% compared to a year ago, and sequentially, our net sales improved by 13.6%. Normal seasonality produced growth compared to the first quarter sales. Q2 medium and heavy duty truck sales shifted from 47% of sales in 2023 second quarter to 56% this year, and power sports remained at 25% in both periods. In addition, other industries, including building products, industrial and utilities, continued to produce softer sales than a year ago. Second quarter gross margin was $17.7 million, or 20% of sales, compared to 21% in the year ago quarter. The change was due to product mix shifts and the loss of fixed cost operating leverage of about 170 basis points in the second quarter, partially offset by pricing changes and lower raw material costs. Before last year's operational improvements, volume and mix shift fluctuations created more volatility in gross margins. Today, we have better margin stability from improved product line profitability and operational efficiencies across all of our plants. SG&A expenses were $10.2 million compared to 10.5 million in the prior year, primarily due to lower bonuses, labor, and benefits, offset by unfavorable foreign currency translation. Operating income for the quarter was $7.5 million, or .4% of sales, compared to .3% of sales in the year ago period. Net interest income was $38,000 in the second quarter, an improvement from $293,000 of net interest expense in the prior year quarter. The $38,000 net interest income this quarter included $340,000 of interest income from our accumulated cash balances. The quarterly interim effective tax rate was 16.3%, comprising the weighted tax costs from the three tax jurisdictions where we operate. Our net income totaled $6.4 million, or diluted EPS of 73 cents per share, compared to $7.9 million, or diluted EPS of 91 cents per share in the comparable year period. Our second quarter adjusted EBITDA was $11.6 million, or 13% of sales, compared to 13.7 million, or .1% of sales in the prior year's quarter. You can refer to our gap to non-gap reconciliation tables at the end of our press release. Turning to the company's financial position, we ended the quarter with $37.8 million of cash and cash equivalents. The company's cash provided by operating activities was $20.9 million for the first six months of 2024, which compared favorably to $18.9 million in the prior year's first half. For the first six months, capital expenditures were $4.8 million, and free cash flows were $16.1 million, an improvement from $14.4 million in the prior year. We expect 2024 capital expenditures to be approximately $13 million for the full year. As of June 30th, 2024, total outstanding liquidity was $87.8 million, which includes cash, and $50 million available under the revolver and capital credit lines. The company's term debt was $22.4 million at the end of the quarter, and our debt to trailing 12 months EBITDA ratio was less than one time. Our working capital continues to be well managed and netted $66.7 million on June 30th, 2024. Our return on capital employed, a pre-tax return metric, was .1% on a trailing 12 month basis. Excluding accumulated cash available for future investment, our return on capital employed was 15.6%, which aligns with our long-term targets of 14 to 16%. Capital allocation strategy remains consistent with prior guidance and includes investments in organic growth, share buybacks, acquisitions, and net debt repayments. Under our previously announced share buyback plan, we repurchase approximately 24,000 shares in the quarter at an average price of $16.41 per share. Earlier this year, we announced that we expected full year 2024 net sales to be down 10 to 15% compared to 2023 in gross margins of 17 to 19%. Due to the ongoing in-customer demand softness and normal seasonality, full year net sales and margins will likely come in at the lower end of those ranges. To be clear, we expect full year sales to be down approximately 15% from fiscal year 2023 and second half margins to be lower than first half margins, resulting in a full year margins closer to the bottom of our margin range. The sales outlook includes a cyclical demand slowdown in truck, stable customer inventories, as well as consumer demand to continue in a more normal seasonal pattern. We are carefully watching for Fed changes to interest rates, which could begin to improve end markets more closely tied to the consumer. As a reminder, Volvo's transition from its existing business truck model to a new one will begin to impact us in the second half of 2024 and continue through 2026. We are bidding on new programs with Volvo and are a trusted vendor. Despite truck customers operating in reduced demand period, our business is well positioned to serve all of our blue chip customers with sole source manufacturing essentials to our customers' long-term growth plans once the economy begins to rebound. As Dave will discuss in a moment, we have signed $42 million of new business and a diverse set of end markets this year due to our invest for growth 2024 must win battle. With that, I would like to turn it back to Dave.

Thank you, John. Our vision at Core Molding is to be the most reliable, innovative and responsive partner in engineering material and manufacturing solutions. We help to bring our vision to life by striving to create what we refer to as the red thread linking our vision to our strategies that tie to our action plans and to our team members' goals. This transparency and clarity are critical to enabling a winning culture and establishing culture as a competitive advantage at Core. We have created an organization that is ready for growth and we have the assets to support growth. As John mentioned, we are excited to report that we have been awarded $42 million of business through the first six months of the year. Over half of this business is new and the remaining is replacement. Because of the technical requirements and validation required with most of our solutions, our quote to cash cycle is 12 to 18 months and therefore the benefits of these wins will be realized starting in 2025 and 2026. We are now focused on strengthening and transforming our sales and marketing organization to leverage the business execution improvements made in the first phase of the transformation. Simply stated, first improve the ability to execute, then increase the volume. We have worked to streamline our quote to cash process to improve our speed and quality of event, enabling Core to better support customer needs. We are driving to make this validation process easier and faster for the customer. Our current sales opportunity pipeline is over $250 million and we are purposely driving to win more of this identified business. Although we are pleased with this year's new business progress thus far, we know that our revenue initiative requires aggressive goals and multiple work streams. Our investor growth initiative has several strategic components I want to discuss today. We first focused on creating flow in all quoting, costing and customer facing processes, improving the execution process. We are driving and enabling ownership for industry verticals by adding four key account managers with ownership for growth in their industry vertical. We are implementing a deeper market and application analysis process and we will be adding executive leadership to support the transformation. We are currently conducting an external search for a chief commercial officer to lead and drive the sales and marketing transformation. We fully expect this major initiative be successfully executed, similar to our transformation of all other areas in Core Molding. The final transformational area is sales and marketing because as we stated, we had to improve the operational execution ability before driving significant growth in the business. We expect to announce the appointment by the end of the year. Growing sales and marketing resources with the right skills to establish market industry ownership is essential. These changes will enable industry ownership and accelerate market growth by industry or vertical. Our market analysis utilizing heat map and hotspot process will enable us to focus our efforts on the highest potential opportunities for our products and processes. We will continue to drive our aggressive lead generation campaign with robust lead generation initiatives through our sales agents, account leaders, customer lunch and learn events, trade show displays and engaging in trade industry associations. Key part of our strategy is to grow wallet share with existing large customers and by streamlining and strengthening our front end processes, we want to be first in the customer's mind to industrialize their designs. We are working with large customers to expand our product offerings to take advantage of our large portfolio processes and supporting customers with cost saving opportunities. Cross-selling of thermoplastics and thermosets allows us to offer customers a unique and likely lower cost or higher value alternative. We are seeing early results of our initial sales and marketing transformation as shown by the 42 million in wins year to date. It is exciting for the team and me to see the improvements in processes, investments in people and clear direction to drive growth in all processes with the confidence that we can execute an aggressive growth plan and make happy customers. Not withstanding a traditional long sales cycle, we continue to pursue opportunities for near-term revenue, supporting customers with mold transfers from challenge suppliers and or supporting technical manufacturing challenges. We continue our vetting process for potential acquisitions that meet our strategic growth criteria for sales channel growth and footprint expansion. John and I believe in being disciplined and prudent and will not rush into an acquisition that is not a strategic fit or does not fit our financial thresholds. We also know that a combination of organic and inorganic growth for core molding is the best way to position the company for long-term growth, enterprise value expansion and cash flow generation. I am confident and excited about our must-win battle of investor growth. Our process for implementing transformational change has been successful and is exciting for the organization to see the opportunities available to core now that we have a strong organization with robust execution processes. We have created the ability to execute well and now we are developing the team of processes to aggressively leverage this into the market that needs trusted supply partners. I appreciate the hard work and dedication of our team and want to thank them for enabling the significant changes we have implemented. In addition to thanking our team, I want to thank our customers, shareholders and the board for their continued support. For our investor relations efforts, we plan to participate in the upcoming Midwest Ideas Conference in Chicago later this month, and in September we are planning a non-deal roadshow with three-part advisors. With that, I would like to open the line for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Again, it is star then one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Chip Moore with Roth. Please go ahead.

Good morning. Hey, Dave and John. Thanks for taking the question. Hey, how are you guys doing? I wanted to start with the investments in sales execution. Good to see, I guess, maybe expand on, it sounds like you're seeing some early returns already, but how to think about, I guess, OPEX implications and then maybe potential lag on return on those investments and not have a follow-up there.

Yeah, it's definitely a challenge that we've thought about as far as seeing where we are with the overall market, seeing all the markets decrease a bit and then where we need to grow. I mean, I think we've seen that we have the ability to execute and we've seen that we can bring the sales in. If there was one thing that we need to drive, it's really increasing sales. And we're at a point now where we can easily put the sales into our capacity that we gain from the operational improvements and the magic wand is really doing all that we can do right now to gain and leverage what we've done on the operational side and the business side. So, growing the sales, and we do have a lag of, say, 12 to 18 months. We're trying to look at business that we can get earlier than that. Maybe it's a mold transfer or working with a troubled supplier competitor, working with our customers. But in the end, it's the investments we need now to grow the business over the next 10, 12 months. Yeah,

no, that's helpful. And I guess the follow-up is sort of on, you know, as you add these resources, how to think about greenfield opportunity versus growing wallet share. And then on the wallet share piece, I think, you know, you've talked in the past about those opportunities, whether it's, you know, inside the truck or maybe some adjacent PowerSports products, just an update there on traction in growing that wallet share.

No, we are seeing growing the wallet share. I mean, a lot of our wins are with existing customers on new programs, so we see that. I always think that we can do more when I look at a Class 8 truck. I think there's a lot of work that we could do on the inside about converting some of the plywood bunks and cabinets and things like that into thermoplastic, something that would fit that need better. We are talking with customers about that. So, we are seeing a lot of opportunities with existing customers in growing wallet share. There's a lot of other opportunities out there as we expand the portfolio with those customers. So, those are the, I would say, the, I don't know if I'd say easier, but those are the more attainable sales because we already have those relationships and we're already deeper in those customers, so we know about those opportunities earlier. And that really is a big part of growing the wallet share, is having that interaction and knowing what's coming down the line and being there, being first in our mind with being able to have a solution for that.

That's helpful, Dave. And maybe on the financial side, I think understandable, right, to come in at the lower end with everybody seen out there. Any more color between the Volvo transition and seasonality and think about that progression in the back half? And I guess volumes as well as margins.

Yeah, I think you've got several moving pieces. I think we said that, and we're still comfortable, that Volvo's impact is probably around $10 million revenue impact this year and the majority of it really hits next year. The seasonality piece, we have seen most of our customers come back to seasonality, but I would also say that we do have a book of business where our customers are being impacted by a slower overall demand that I think is the result of the Fed and what the Fed has done. Long-term, I think, is if the Fed starts to loosen up interest rates, I think all our customers are very bullish that they're gonna grow again. And again, the nice part about our business is that we talked about this a lot, is we're sole source on their tools. And so if they grow, we grow with them. And so, but the back half of this year, I think our guidance really, we've seen a little bit of additional, it's still softer than what we had expected early in the year. But again, still all customers, we retained all customers and we look to grow with them as they return to their growth going into next year and those types of things. And so, some of the seasonality, but some is just slowness in most of our end markets at this point too.

That's helpful. And maybe just the last one, right? I mean, the cash generation is great and obviously no net debt now and generating some accretion there. The M&A side, what are you seeing? I think, right, you've talked in the past about geographic, Southwest, but any other color on what you're seeing on sort of the tuck-in opportunity.

Yeah, we think that's a great question. Said last quarter, we did hire an outside banker that really focuses on buy side. We've identified targets. The challenge we have is there's not as many players in the market today that wanna be bought, but that's not holding us back. We have outreach programs using the bankers to go through and we evaluated the pipeline and then provided them with who we really wanted to go talk to. And they're active in that at this point. One of the things that's, with these types of acquisitions, none of those guys are up for sale today. So it's about us, kind of working with those potential targets and getting them to understand the benefit of joining core and having us together. But we're actively doing it just in a market that right now is probably a little bit slow on the M&A side where people are really looking to sell their businesses, but doesn't mean we won't stop trying to find that right acquisition that makes sense for us.

Yeah, we're always looking, we're evaluating. We know exactly what we wanna get or how we wanna add that, so.

That's excellent. Okay, thanks, I'll hop back in queue. Thank you very much, appreciate it.

Thanks,

Chip.

Again, if you have a question, please press star then one. This concludes our question and answer session. I would like to turn the conference back over to Dave Duvall for any closing remarks.

Thank you for your continued interest in our company. We look forward to providing an update on our progress when we report the third quarter results in November. Have a great day, thank you.

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