The Eastern Company

Ladies and gentlemen, welcome to the Eastern Company first quarter fiscal year 2022 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. 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 for joining us today. Speaking today will be Eastern's president and CEO, Gus Black, and our CFO, Peter O'Hara. 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 recently filed Form 10-K. 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 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 who have joined us on the phone. and those participating via the web. We released Eastern's first quarter numbers on our Form 10Q yesterday afternoon. Before Peter reviews the detailed results with you, I would like to take a few minutes to reflect on the quarter. This was another strong quarter for Eastern with solid revenue growth. Net sales from continuing operations grew to 69 million in the first quarter of 2022. That's an increase of 12% over the first quarter of 2021. And it's another quarterly sales record in Eastern's 164 year history. Orders from our customers were strong and importantly, our backlog at the end of the first quarter reached 86 million. That's a year over year increase of 23% and an increase of 4% since the start of the year. a strong backlog positions as well for the coming quarters. Sales growth underscores effective execution by each of our businesses to benefit from favorable demand trends across our core markets. For example, our big three precision team built new sales and project management capabilities to capitalize on the increase in new automotive launches, including several electric vehicle launches. As a result, sales of our returnable transport packaging products grew approximately 16% in the quarter compared to the prior year. We project that demand for returnable transport packaging will strengthen further through the remainder of this year and beyond as the pace of new vehicle launches accelerates. At the same time, sales of our recently launched truck mirror programs gain momentum as truck builds for these new programs ramped up. and sales in this market are expected to remain robust. According to ACT research, Class A truck builds will reach 220,000 in 2022. That's an increase of 12% over 2021. And ACT research projects that 265,000 new Class A trucks will be built in 2023. We sustained our momentum from last year through the first quarter and into the second quarter with strong sales, a healthy pipeline and growing end markets, and solid execution by our teams. Our business portfolio is aligned with significant demand trends, and we're expanding our capabilities to benefit from these trends. Our balance sheet also reflects our growth. To ensure we can fulfill customer demand across a broad range of product offerings, we temporarily dedicated additional capital to improve our inventory on hand, which did impact our free cash flow generation during the quarter. By temporarily increasing our inventory levels, we can best guarantee the availability of all necessary input materials that we need to meet our customer demands and score some impressive competitive wins. In addition, in the quarter, we experienced a resurgence in raw material costs for certain key commodities. We also continue to see labor shortages and supply chain constraints. And while material cost inflation impacted gross margin in the first quarter, we are working to mitigate the impact primarily through successive rounds of needed price adjustments across each of our businesses. Our most recent rounds have gone into effect in May and will continue through June. And we expect to see significant benefits from these actions in the coming months. Now, as you may know, John Sullivan is retiring after a 46-year career at Eastern, and Peter O'Hara has joined us. So, I'm going to turn the call over to Peter to go over the details of our financial results.

Thank you very much, Gus, and thank you to everyone who is on the call today. It's an exciting time to join the Eastern Company, and I look forward to building relationships with our customers, shareholders, and analysts. My remarks this morning will focus on Eastern's results for the first quarter of 2022. For the quarter, net sales increased 12% to 69 million from 61.8 million a year earlier. Sales increased primarily due to increased demand for truck accessories and automotive returnable transport packaging products, as well as from distributors. Our returnable transport packaging sales benefited from an increase in upcoming new automotive product launches, including several electric vehicle launches. The effect of volume on existing products increased net sales by 4% year-over-year, while price increases in new products contributed an additional 8 percentage points. New products included various truck mirror accessories, rotary latches, D-rings, and mirror cams. Price increases primarily reflected our efforts to recover increases in raw material and freight costs. Gross margin as a percent of sales was 21% in the first quarter of 2022 compared to 25% in the prior year. The decline of gross margins in the quarter reflected the ongoing impact of rapid increases in raw material commodity prices. We are currently in the process of making the latest round of price increases to mitigate this impact on future earnings. Product development costs increased two-tenths of a million dollars or 18% in the first quarter of 2022 compared to the first quarter of 2021. As a percent of net sales, product development costs were 1.7% for the quarter compared to 1.6% in the first quarter of 21. The cost increase is primarily due to one-time reimbursements in the prior year that did not repeat in the current period from truck OEMs for engineering and product samples related to new mirror programs. Selling and administrative expenses increased nine-tenths of a million dollars, or 10% year-over-year, primarily as a result of increased commissions and other selling costs, payroll-related expenses, and travel costs. The increase in selling expenses reflected both the impact from increased sales as well as strategic investments we have made into our sales capabilities. Net income from continuing operations for the first quarter of 2022 was $2.7 million, or $0.43 per diluted share, compared to net income of $5.7 million, or $0.90 per diluted share in the prior year. Notably, adjusted for one-time items, earnings per dilute share from continual operations for the first quarter were 46 cents compared to 69 cents in the prior year. Adjusted EBITDA for the first quarter was 6.1 million compared to 7.9 million in the first quarter of 2021. In terms of operating cash flow, the company consumed approximately $3.6 million in cash from continual operations during the first quarter of 22 compared to generating approximately 1.3 million in the prior year. Cash flow during the quarter was impacted by an increase in working capital. The effect of COVID-19 pandemic and the related recent shutdowns in China continue to impact our supply chain. And so as a result, both inventories and accounts payable have increased due to increased shipping time, poor congestion, and selective pre-buying of raw materials to ensure availability and to mitigate the impact of likely future inflationary price increases. As of April 2nd, 2022, we held cash and crash equivalents of approximately $5.1 million. With that, I'll turn the call over to Chris for questions. Thanks, Peter.