Q1 2024 Eastern Company Earnings Call

Participants

Marianne Barr; Treasurer and Corporate Secretary; Eastern Company

Mark Hernandez; President, Chief Executive Officer, Director; Eastern Company

Nicholas Vlahos; Chief Financial Officer, Vice President; Eastern Company

Ross Davisson; Analyst; Banneton Capital LLC

Presentation

Operator

Good morning, everyone, and welcome to the Eastern company's First Quarter Fiscal Year 2024 earnings call. (Operator Instructions) Please note this conference is being recorded.
I will now turn the conference over to your host, Marianne Barr, Treasurer of the Eastern company. Marianne, over to you.

Marianne Barr

Good morning, and thank you, everyone, for joining us this morning for a review of the Eastern company's results for the first quarter of 2024. With me on the call are Eastern's President and CEO, Mark Fernandez, and Eastern CFO. Nicholas fully of the company issued an earnings press release yesterday after the market closed.
If anyone has not yet seen the release, please visit the Investors section of the company's website, www.easterncompany.com, where you will find the release under Financial News. Please note that some of the information you will hear during today's call 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 expenses, 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. We undertake no obligation to review or update any forward-looking statements to reflect events or circumstances that occur after the call. For more information regarding these risks and uncertainties, please refer to risk factors discussed in our SEC filings, including Form Form 10-K filed with the SEC on March 12, 2024 for the fiscal year 2023 in Form 10-Q filed with the SEC on May sixth, 2024.
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. A reconciliation of each of the non-GAAP measures discussed during today's call to the most directly comparable GAAP measure can be found in the earnings press release.
With an introduction, I'll turn the call over to Mark.

Mark Hernandez

Thank you, Marianne, and good morning to both to both those who joined us by phone and those participating via the web.
As you know, 2023 was a year of transformation for Eastern, during which we revamped our core operations for long-term growth and shareholder holder value creation. Our operational improvement initiatives drove increasingly strong results as the year continued.
And in Q1 of 2024, we made additional progress even though seasonally, the first quarter is not a strong one for us. I'll provide just a few highlights of the quarter now, so I can spend more time later in the call going over our plans and activities for 2024 and beyond.
First, through our consistent focus on operational excellence, we greatly improved our gross margin and earnings year over year. Our drive to reduce Eastern's inventory down by $3.5 million from year end 2023 continued to contribute to our results. We made further progress in strengthening our balance sheet reducing long term debt to $43.1 million and positioning Eastern to pursue M&A opportunities that accelerate our objectives.
In addition, we grew our backlog 22% to more than $97 million since the year end 2023, reflected reflecting the positive impact of our steps to enhance relationships with key customers and more stable order flow we achieved allowing us to enter Phase two of focused commercial business, commercial transformation for organic growth.
In all of our divisions book to bill ratio, a very positive sign as we move into Q2, it has been positive for all companies. Additionally, we launching some significant new products in this quarter. It's a little too early to talk about them now, but I look forward to providing more details as we get further into the programs.
I will now turn the call over to Nick for a quick review of our first quarter financial results.

Nicholas Vlahos

Thank you, Mark, and good morning, everyone. As Mark said, I'll run through our results for the first quarter of 2024. For the period, net sales decreased 6% to $67.9 million from $72.5 million in the 2023 period, primarily due to lower demand for truck accessories in returnable transport packaging products, partially partially offset by strong orders for truck mirror assemblies during the quarter, distributors continued to work through inventories built up in response to supply chain challenges, but based on our recent conversations with our distributor customers and current quarter activity.
We believe this process is finally winding down. As Mark mentioned, our backlog as of March 30th, 2024 increased 22% to $97.4 million compared to $80.1 million as of December 30th, 2023. The increase was driven by orders for truck mirror assemblies, including a launch of Belvac new mirror program for Class A. trucks.
Gross margin as a percentage of sales in the first quarter was 24% compared to 21% in the 2023 period. The increase in margin primarily reflects improved price cost alignment and various other cost-saving initiatives. As a percentage of net sales, product development expenses were 2% compared to 1.9% for the 2023 quarter.
Selling and administrative expenses decreased 4% for the first quarter of 2024 compared to last year's period. The decrease was primarily due to lower legal, professional selling costs and payroll expenses.
Other income and expense for the first quarter of 2024 increased $0.6 million compared to the 2023 period. The increase in other income of $0.6 million was primarily driven by unfavorable working capital adjustments of $0.4 million in the 2023 period related to the sale of the green walls business.
Net income for the first quarter of 2024 increased to $1.9 million or $0.31 per diluted share from $0.6 million or $0.1 per diluted share in the 2023 period. And the first quarter of 2023 net income was negatively impacted by $1.8 million in severance expenses related to the elimination of the chief operating officer position, the departure of the Chief Executive Officer and $8.4 million related to the sale of the green wall business, partially offset by $0.5 million for the non-GAAP tax impact of the adjusts.
Adjusted EBITDA, a non-GAAP measure for the first quarter of 2024 was $5.2 million compared to $5.5 million for the first quarter of 2023. At the end of the first quarter, our senior net leverage ratio was 1.4:1, down from 2.05 at the end of the 2023 period. In addition, we invested $1.8 million in capital expenditures and paid dividends of $0.7 million for the first quarter.
Cash flow from operating activities was $3.6 million compared to $6.9 million for the last year's period. The difference was primarily due to increases in accounts receivable and lower reductions in inventory, partially offset by accounts payable as of March 30th, 2024, inventories totaled $55.8 million, a decrease of $3.5 million from year end 2023.
That completes my financial review I'll now turn the call back to Mark.

Mark Hernandez

Thanks, Nick. At this point, I'll review our key strategies and activities for the rest of 2024 and beyond. As a first step, I'd like to be sure that everyone understands the mission we are pursuing for the Eastern company because it provides important perspective on the way we are now running the company our goal is to be more than just a product manufacturer.
We want to be a trusted partner who provides engineered solutions that add interest, intrinsic value to our customers. Our shareholders and our employees. We want Eastern to be the company, our company, our customers want to do business with.
So they actually look for opportunities to work with us and are invested in our success. We are starting to see already as a result of our improved operations, high-quality products and on-time delivery and our many visits and conversations with Eastern some customers. Our higher backlog, for example, illustrates the improved perception and the higher level of trust in Eastern that our customers are building.
Lastly, a few earnings calls. I've talked about the four pillars of our strategy for building a solid foundation of reliable earnings from operating activities, which we've been key to helping us achieve our improved results.
As you recall, the pillars, our disciplined operations, optimum capital utilization, focus, commercial business, and it faced a phase we're now and just entering value added acquisitions and vertical integration. Just a few days ago, we attended an M&A conference where we made many useful connections with professionals who can help us identify strong price prospects of appropriate size for Eastern and execute transactions quickly and efficiently.
We are especially interested in finding opportunities for vertical integration so that we rather than paying a supplier to do something we're capable of doing ourselves. We take on that task and capture the savings in our cost of goods sold, which then flow to the gross margin improvement in our year-end call I spoke about the importance of overarching one is to philosophy, which means that rather than functioning as three separate companies.
Our goal is to act as one company, leveraging our size and activities across our divisions to enable us to provide the best value to our customers and the best results for our shareholders. One is to approach has had a very beneficial impact on our operations already, and we're now executing actions such as maximizing our return from the company's footprint in Mexico and Asia so that we can make the best possible manufacturing decisions based on availability of labor, wage structures and component costs.
Centralize actions in HR and IT rather than duplicate those functions across the divisions, leveraging our procurement suite, which is our spend on direct material, indirect material and expense to achieve a more efficient expenditures throughout our operating divisions.
We are also planning a $3.5 million investment in plastics manufacturing capabilities that will help us build the business in the businesses of all three of our operating divisions. We have a pilot program underway now. So the efforts such as these Eastern as a whole can achieve more than any one single divisions capable another fundamental conference concept I would like to touch on today is our shareholder value creation cycle.
It starts with our with our divisions being a trusted partner and with disciplined business operations. These elements produce stronger operating results, which translate into increased earnings, increased cash flow and the ability to pay down debt. Improved results start the process of the strengthening of the issuance market capitalization and total shareholder return then comes the growth phase, which encompasses organic growth, acquisitions and vertical integration.
At the moment, our internal growth projects include electromechanical development at Eberhard lighter solutions that save the customer money at Big Three and advancing our integration of Shore flex acquisition to provide aftermarket solutions at Belvac. We live this loop of value creation every single day and we are pushing it forward as fast as we can.
Our May '24 investor presentation includes a slide that illustrates our shareholder value creation cycle. And you may want to take a look at it after today's call, the deck is posted on the Investors Information section of our website under Events and Presentations.
With that, we'll we'll open up for questions.

Question and Answer Session

Mark Hernandez

I would like to kick off the question section with some shareholder questions that we've received over the last couple of weeks just to prime the Prime Media solution.
So the first question is you seem to have a strong relationship with your customers. Is that a strategy of start to grow the present set of products, Eastern manufacturers or these customers as eastern to broaden its manufacturing capabilities to offer additional products?
But what I said earlier, we want to be the trusted partner that our customers want to come to with opportunities that we can further provide values because they trust us, they trust in our ability to deliver them. They know that we're on we're reliable and that we can produce as we go through another opportunity is if we go through cycles in the commercial vehicle industry, there's going to be companies that are that are going to be spun off from private equity and some other opportunities where they're not performing as well as much as demand from our customers know this upfront probably more so than we do and will come to us with opportunities to grow our business going forward because they can trust us and rely on us to provide.
Second question, how does Eastern competes in the marketplace today compared to the to the previous Ron before I took over as CEO, Nick took over as CFO?
What I can say is that our new foundation is an alignment of business philosophy and that starts with codifying our strategy of four pillars so that everyone across the divisions understands what we're trying to do at the Eastern company and cascade that down into their organizations to achieve results beyond what they are today to what they would anticipate within themselves and capabilities.
Couple that with the one issue philosophy where we synergize across our divisions and we participate in making Eastern better at the same time of making you through our divisions stronger and then targeting organic growth to commercial transformations through products that we exist today with customers we exist today. But as well as adjacent markets that we're looking to enter.
The third question, I'll give to Nick. Nick, what what conditions need to be met by the company to consider another significant transaction and M&A activity?

Nicholas Vlahos

So for us, we want to make sure that we have our appropriate working capital efficiency. We have been down the path of lowering our debt, and we want to continue to be able to do so and then a consistent operating performance. And those are the three main conditions we're focusing on while we look towards other significant transactions.

Mark Hernandez

Okay. Operator, we'll turn it over to calls in the queue.

Operator

Thank you very much. We are now opening the floor up to the phone lines. (Operator Instructions)
Ross Davisson, Banneton Capital

Ross Davisson

Nick, thanks for taking the question on revenue and backlog. I just wanted to ask you. The revenue is down by 6% year over year, but it was about flat sequentially and then the backlog was up nicely. Does that backlog give you any sort of indication of prime plus one or whatever else you're hearing give you any indication of sort of when we might see growth restart?

Mark Hernandez

Yes, Russell, the impact in the first quarter was primarily due to two four things across our two major projects. One defense project in the USPS. launch are being delayed that we expect to come online later in the year. And then the distributor model that we talked about, I think burned through their backlogs, and we're addressing that to our commercial transformation by expanding on our penetration of available products to distributors as well as touch points with the distributors going forward and leveraging that going forward.
And then the last the last thing that impacted us was the kind of slowdown in returnable packaging as the the automotive companies in the commercial vehicle companies kind of decide on what 2024 is going to look like. And so they delayed some of their orders, but we're back we're back in line now.
So our book-to-bill ratio, I think, is a short-term indicator that shows that we have confidence in the rest of the year as well as our backlog. The backlog increase was primarily due to the relationships we have with the customers to get a solid foundation of orders going forward. So we feel confident throughout 2024 that, it was just a lull in the first quarter and that will we'll see on the second third, fourth quarter being stronger than than we anticipated and getting back on track for 2024.

Ross Davisson

Okay, great. Thanks. That's helpful. And then just last question on gross margins. I know it's I know it's not easy and different things can happen each quarter. Was there anything in particular to highlight about what drove the sequential decline in gross margin from, I think 26.8% in Q4 to what we saw in Q1?

Nicholas Vlahos

So there wasn't any particular and in particular, I highlight. I guess the one thing I would mention is the end-of-year life of adjustment that we make from that was a benefit in the fourth quarter. However, your first quarter you typically see lower margins compared to the rest of the year for the Eastern company.

Mark Hernandez

And couple of that with the reduction in revenue or SG&A was set up to be at a higher level of revenue. So we saw some deterioration from the from the fourth quarter. But optimistically speaking, it should come right back as we right this ship on revenues going forward.

Ross Davisson

Okay. Yes, that makes sense. And I do recall the LIFO adjustment. So thanks for the context and good luck for the rest of the year.

Operator

Thank you very much. (Operator Instructions)
I'm not seeing any further questions come into queue. I will now hand back over to Mark Hernandez for any closing.

Mark Hernandez

Thanks for joining us today. We have with the strong operational foundation. We've created the steps we're taking to establish. Eastern is an agile solutions provider and our new focus on mergers and acquisitions and make versify. We believe we're on the right path to building a bigger, better and more profitable company.
The macroeconomic environment for our industry is good, and we're positioning Eastern to take full advantage of the opportunities that arise, and we look forward to giving you another update in August. In the meantime, if you have any additional information or if you need any additional information, please reach out to us. Thanks again for joining us today.

Operator

Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day and thank you for your participation.