The Eastern Company

Good day, ladies and gentlemen, and welcome to the Eastern Company fourth quarter fiscal year 2021 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. If you have any questions or comments, you can submit them through the webcast by typing them into the Ask Question box. If you wish to ask a question via telephone, please press star 1 on your phone at any time to join the queue. If you wish to leave the queue, press star 2. We do ask that if you are listening on a speakerphone to please pick up your handset for optimum sound quality. It is now my pleasure to turn the floor over to your host, Chris Moulton, Head of Corporate Development. Sir, the floor is yours.

Good morning, and thank you, everyone, for joining us. Speaking today will be Eastern's President and CEO, Gus Black, and our CFO, John Sullivan. After that, we'll open the call for questions. Please note that some of the information we'll 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 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-K filed yesterday. In addition, during today's call, we'll discuss non-GAAP financial measures that we believe are useful as supplemental measures of Easter's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. With that, I'll turn the call over to Gus for opening remarks. Thanks, Chris. And good morning to those of you who've joined over the phone and those participating via the web. We released Eastern's fourth quarter and full year 2021 numbers on our form 10K yesterday afternoon. Before John Sullivan reviews the detailed results with you, I'd like to take a few minutes to reflect on the year. Let me start by saying that 2021 was truly a transformative year for Eastern. We're very proud of how we executed our plan to create long-term shareholder value in a dynamic environment. We focused on doing everything we could to keep our teams safe and our supply chains moving, wrapping up production to address the strong demand for our products and helping our communities recover. At the same time, our focus on performance and innovation remain unwavering. I want to once again thank our high performing teams around the world for their continued commitment to Eastern. I'm truly grateful for their efforts every day to ensure our success going forward. In 2021, we successfully executed several strategic moves to strengthen and transform our business portfolio into a faster-growing and more profitable franchise. We announced our intention to divest three non-core businesses and reported them as discontinued operations on our Form 10-Q for the second quarter of 2021. We subsequently divested both Fraser & Jones and Green World Industries in November of last year, which follows the sale of Canadian Commercial Vehicles and Sesame Mexicana in 2020 for a total of four divestitures in two years. These divestitures allowed us to reduce our outstanding debt by $17.3 million and repurchase approximately 15,000 shares in 2021. Last year, we also completed the integration of our Eberhard and Eleanor Locke businesses. We combined these two organizations to build scale improve innovation, and capture operating synergies. As part of the integration, we closed our manufacturing and warehousing facilities in Tilsonburg, Canada and in Wheeling, Illinois, and we moved operations to our current location in Strongsville, Ohio and Reynosa, Mexico. In 2022, we plan to further consolidate manufacturing into Reynosa, Mexico, including moving some production from Asia. We believe that our expansion into Mexico will build shorter supply chains, more robust supply chains, and improve logistics to better serve our core customers. Further, in 2021, we capitalized on the extraordinarily robust demand rebound in our customer demand fueled by macro trends, including the surge in outdoor recreational activity and commercial transportation, which in turn fueled demand for truck accessories and distribution products. We also experienced a meaningful pickup in demand from our transfer packaging customers as new automotive and commercial vehicle model launches accelerated. Last year, I remember describing 2020 as unprecedented turmoil. Yet, the environment in 2021 proved equally dynamic. As I mentioned before in these calls, we saw unparalleled growth in raw material costs. To give you an example, the price of hot-roll steel increased from $500 per ton in August of 2020, right at the time we were pricing some of our 2021 sales, to a peak of $1,945 per ton in August of 2021, as we were buying some of the steel to produce some of those sales. And we buy more than 5,000 tons of hot roll steel per year. And we were able to pass on most of the increases in raw material and shipping costs, as you can see in our gross margin of 23% for the year. But many of our price increases lagged the growth in material costs. And in some instances, we were not able to raise prices. As a result, the impact on our earnings was material. Raw material costs are more stable now than they were last year, and even with the war in Ukraine. For example, hot-rolled steel is at approximately $14.50 per ton today, which is close to where it was a year ago. It's important to add that we navigated a rapidly evolving operating environment and prioritized meeting the strong demand from our customers by increasing our safety stocks and adding new suppliers. As a result of those decisions, free cash flow was temporarily impacted as we strategically built the inventory required to serve our customers and navigate the stretched global supply chains and support the current backlog, which is up 28% at the end of 2021 over the end of 2020. As you can see, we had a truly transformative year. I'll share some thoughts on 2022 at the end of the call. So for now, I'll turn the call over to John to go over the details of the financial results. Thank you, Gus.

For the fourth quarter of 2021, net sales increased 18% to $59.6 million from $50.6 million in the fourth quarter of 2020. Sales increased primarily due to higher demand for truck accessories, distribution products, and automotive returnable packaging, as well as improved pricing. Sales volume of existing products increased 6%, and price and new products contributed 12% in the quarter. New products included various truck mirrors, latches, and accessories. For the full year 2021, net sales increased 25% to $246.5 million from $197.6 million in 2020. Gross margin as a percent of net sales for the fourth quarter of 2021 was 20 percent compared to 23 percent in the prior year fourth quarter. The decrease reflects the combination of higher material and freight costs. Gross margin for the year as a percentage of sales was 23 percent in 2021 compared to 24 percent in 2020. Product development expenses in the fourth quarter of 2021 of $1 million was up 192 percent when compared to the fourth quarter of 2020 As a percentage of net sales, product development expenses was 1.7% compared to 0.7% in the fourth quarter of 2020. The increase is primarily related to our investment in new products at Eberhard and Veldeck. Selling and administrative expenses in the fourth quarter of 2021 increased 8% compared to the fourth quarter of 2020. The increase was primarily the result of increased payroll-related expenses, increased travel and other expenses as business returned to more normal operations in 2021. Net income for the fourth quarter of 2021 increased 24% to 3.9 million or 62 cents per diluted share from 3.2 million or 50 cents per diluted share in 2020. In the fourth quarter of 2020, net income was negatively impacted by non-cash goodwill impairment charge of 0.7 million net of tax, and non-recurrent restructuring, factory relocation, and transaction costs of 0.9 million net of tax. For the full year 2021, net income increased by 40% to $16.2 million, or $2.58 per diluted share, from $11 million, or $1.76 per diluted share in 2020, Adjusted EBITDA from continuing operations for the fourth quarter was approximately $5.7 million compared to approximately $7.3 million for the fourth quarter of 2020. Adjusted EBITDA from continuing operations for the full year of 2021 increased approximately 8% to $26.7 million from $24.7 million in 2020. Now for a quick summary on the cash flow and the balance sheet highlights. On a full year basis, net cash used for operating activities was $7.8 million in 2021, compared to $14.6 million net cash provided by operating activities in 2020. In 2021, we contributed $2.3 million to our defined benefit retirement plans. During 2021, cash used to support additional working capital requirements was $22.9 million. which was primarily due to management's focus on ensuring availability of inventory to meet customer demands during the current supply chain constraints. By way of comparison, in 2020, cash used to support additional working capital was $5.6 million. Total capital expenditures for 2021 was $3.7 million. However, we expect capital expenditures in fiscal year 2022 to be approximately In 2021, the company made total debt payments of $17.3 million, of which $11 million was on an accelerated principal payment. As of January 1, 2022, we had cash and cash accruals of $6.2 million. Our net leverage ratio stood at 2.46 and our fixed coverage ratio at 2.2, both of which are well within our bank covenants of four and a quarter and one and a quarter respective. With that, I'll turn the call over to Chris for questions.