Core Molding Technologies, Inc. (CMT) Q3 2022 Earnings Report, Transcript and Summary

Good morning, everyone and welcome to the Core Molding Technologies Third Quarter Fiscal 2022 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded today. Now, I will turn the call over to Steven Hooser, Three Part Advisors. Please go ahead, sir.

Thank you, and good morning, everyone. We appreciate you joining us for the Core Molding Technologies conference call to review third quarter results for 2022. Joining me on the call today are Core Molding's President and CEO, Dave Duvall; and the company's Executive Vice President and Chief Financial Officer, John Zimmer. Before we begin, I would like to remind you that 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 during 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. Forward-looking statements, by their nature, are uncertain and outside 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. Core Molding Technologies assumes no obligation to publicly update or revise any forward-looking statements. Management will refer to non-GAAP measures, including adjusted EBITDA, free cash flow, return on capital employed and adjusted net income and earnings per share. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. 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 been included in an 8-K submitted with the SEC. And with that, I’d now like to turn the call over to Dave Duvall. Dave?

Thank you, Steven, and good morning, everyone. I want to start today with a summary of some recent good news. A few weeks ago, we executed a new agreement with United Forest Products to extend our relationship for another five years. We supply decorative lattice products that UFP provides to commercial and residential customers throughout major big box home improvement retailers throughout the U.S. With this long-term relationship and others like it, we look forward to continuing to be a valuable partner for building products, industrial, utilities, packaging, transport, powersports, as well as critical infrastructure businesses throughout North America. Although we remain cautious in our outlook like most companies in this environment, demand remains solid and at certain end markets demand is strong. Fortunately, we are a key and trusted supplier in a number of growing companies and industries. And as businesses plan for their 2023 production, they are locking in agreements with us. We have done a significant amount of work to develop supply agreements that are mutually beneficial with our partners and our new agreements will allow for price escalations when input costs increase. We remain an essential manufacturer in vital end markets and as macroeconomic headwinds hit, U.S. businesses want security and confidence in their supply chain, especially after navigating the recent supply chain disruptions and sea freight challenges we've experienced. Turning to our performance for the first nine months of the year, net new wins this year grew to 24 million and our opportunity pipeline remains robust at 110 million. As a reminder, our aggregate pipeline represents all active new business opportunities. This year, we are pleased with the wins we are capturing, which I believe further demonstrate our ability to select and manage projects that best utilize our assets and our ability to capture higher margins. Results for the third quarter were strong, but product mix was the primary [influential margins] [ph] in the quarter. We are pleased to report record high sales this quarter, growing net sales by over 25% to nearly $102 million. Despite the strong revenue performance, normal seasonality revenue diversification tipped back towards medium or heavy duty truck, which moved from 39% in the second quarter to 49% in the third quarter of this year. John will cover this in more detail in a few moments, but from a high level, this is the primary reason our sequential gross profit margin was essentially flat between Q2 and Q3 of this year. I also want to point out some meaningful progress and product launches during the third quarter. Product launches and product sales represent net new wins communicated in 2021 and 2022 that are in production and currently being launched. We reported strong third quarter increases in product sales up 36.5%. A few example of product launches include the last mile truck project, which is now in full production. And in addition, we launched a number of new powersport projects. Finally, in the industrial and utilities categories, we had a major launch that is now in full production, as well as a number of projects related to stormwater solutions, [flush cover] [ph] products, and other industrial utility projects, that are expected to be in production by Q1 of 2023. We're excited about each of these customer launches because they are in large end markets where we have provided engineering solutions with the help of our technical solution team. Each of these projects are important because they align to our strategy of continued diversification, and providing an engineered solution, which directly drives our margin enhancement initiatives. With that, I would now like to turn it over to John to cover the financials in more detail.

Thank you, Dave, and good morning, everyone. Third quarter 2022 net sales totaled $101.6 million, up 25.4% versus a year ago, and product sales increased 36.5% versus the prior year period. Revenue increases were largely driven by higher customer demand and our transportation in powersports industry, new program launches, as well as raw material recoveries. Gross profit for the third quarter was $13.3 million or 13.1% of sales, compared to $6.4 million or 7.9% of sales in the prior year quarter. Recall last fall in 2021 that we experienced a period of rapid inflation in the U.S. so our margins reflected that impact to our business. We quickly reacted last year and started to work with our customers to recover raw material price increases. As expected, efforts to pass through raw material inflation have been challenging with significant ongoing negotiations. The results of our efforts though can be seen in improved gross margin. The net impact of changes in selling price and ongoing raw material inflation resulted in an increase in reported gross margin of 790 basis points in the third quarter of 2022, compared to the same period in 2021. The gross margin in the third quarter was primarily impacted by product mix shifts, coupled with production inefficiencies. As Dave previously discussed, sequential gross margin for the quarter two to the quarter three of 2022 was basically flat, which was due primarily to product mix. The medium and heavy duty truck market was approximately 49% of product sales in the third quarter of 2022, compared to approximately 39% in the second quarter. This shift in revenue mix was driven by normal seasonality along with a heavy push by our truck customers for increased demand. Raw material inflation has somewhat leveled out in the third quarter and we’ve seen some decreases in [indiscernible] prices. We will continue to work with customers to pass through changes in raw material costs going forward. As Dave mentioned, we are carefully watching for customer demand changes, which we could see in the last quarter of 2022 or early 2023 if recessionary pressures increase, but nothing meaningful yet. Selling, general, and administrative expenses for the quarter were $8.7 million, compared to $8.8 million in the prior year period. Prior year SG&A included $1.8 million of closing costs from shuttering the Cincinnati plant. Excluding last year's plant closing costs, SG&A cost as a percent of net sales remained approximately flat, compared to 2021. In the third quarter, the company reported operating income of $4.6 million. Q3 net income aggregated $1.3 million or $0.16 per share, which included a one-time $1.6 million or approximately $0.19 per share loss on extinguishment of debt resulting from our debt refinancing that was completed in July. The loss resulted non-cash write-off of previous debt issuance cost of approximately $1.2 million and early extinguishment fee of approximately $350,000 to repay approximately $12 million of 8.25% fixed interest debt. The 2021 third quarter net loss was $3.3 million or $0.41 loss per share. Adjusted EBITDA for the third quarter of 2022 was $8.4 million or 8.3% of sales. You can find the GAAP to non-GAAP reconciliation tables at the end of our press release for both third quarter and year to date numbers discussed today. Now, turning to results for the first nine months of 2022. Net sales totaled $290.9 million, up 24% versus a year ago, and product sales increased 28% versus the prior year period. Sales increases were largely driven by strong customer demand and new program sales, demonstrating success of our strategic revenue diversity of objectives, and raw material recoveries. Gross profit for the first nine months was $40.9 million or 14.1% of sales, compared to $32.9 million or 14% of sales in the first nine months of fiscal 2021. Gross margins were impacted by favorable net selling prices in excess of raw material cost increases offset by unfavorable product mix and production inefficiencies. The company has experienced operational inefficiencies and program launch startup costs in two of our plants, which we are working on reducing. SG&A costs for the first nine months were $25.9 million, compared to $23.7 million or $21.7 million, excluding plant closure costs in the prior year period. Year to date operating income was $15 million and below the operating income line, we recorded the write-off of debt issuance cost of $1.6 million. Net income for the first nine months aggregated $7.4 million or $0.87 per share, compared to net income of $4.2 million or $0.50 per share in the prior year. Year to date adjusted EBITDA was $25.9 million or 8.9%, compared to $18.7 million for the prior year. Turning now to the company's financial position, cash flow and balance sheet. The company's cash provided by operating activities totaled $8.5 million for the first nine months ended September 30, 2022, and capital expenditures for the same period were $12.3 million. The increase in working capital, specifically accounts receivable is related to increased sales this year. Approximately $7.5 million of the year to date capital expenditures relate to capacity increases and or the launch of new programs. We estimate that our capital spending in 2022 will now be approximately $18 million and two of our new presses and robotics came online and are operational. Adding presses in automation this year allows us to maximize our current footprint, add capacity, and drive higher throughputs and efficiencies, which have incrementally increased our revenue and reduced our reliance on labor. At September 30, 2022, the company had available liquidity of $46.5 million, consisting primarily of 20.9 million under our revolving credit facility and $25 million of available liquidity under our cap line of credit. The company has term debt of $24.5 million at the end of September and our term debt to trailing 12-months EBITDA ratio was less than 1x adjusted EBITDA at quarter-end. The company's working capital remains strong and we ended the September quarter with accounts receivable at $54 million in days sales outstanding or DSO at 48 days. Our return on capital employed, which is a pre-tax return metric, was 14.6% on an annualized basis. We continue to believe that our strong balance sheet coupled with sufficient liquidity provides the company with the flexibility to continue to grow. Recall that in July, the company successfully refinanced its debt facility and entered into a new aggregate $75 million credit agreement for its revolving loan, term loan, and CapEx loan commitment. We also swapped daily floating SOFR for a fixed 2.95% interest rate on the term loan as part of a swap agreement. With the credit agreement margin of 180 basis points, our term loan debt increased interest rate at September 30, 2022 was 4.75%. Concurrent with the new credit agreement, we repaid all of our existing credit facility, which charged higher interest rates than the new facility. These activities improve our liquidity position, strengthens our balance sheet, and lowers our weighted average cost of debt and debt service cost. Although our strategic business transformation continues, we see changes quarter-to-quarter related to product mix shifts that impact revenue diversification targets, as well as production efficiencies that impact gross margin. We will remain laser focused on all of our controllables related to input costs and productivity and our technical sales teams are continuing to make progress on designing engineered solution and conversions that enhance grow margins. Improving operational efficiencies on the production floor of our plants with the addition of more presses in certain facilities allows us to immediately ramp throughput and sales. Of our six manufacturing facilities, we are working to improve one plant more than the others for two reasons. One, from a product mix standpoint, this facility handles more volume in the heavy duty truck. And two, the plan is less efficient based on facility infrastructure that we can improve, which we are working on. We remain firmly dedicated to core strategic growth and profitability goals with programs to drive long-term value creation in 2022 and beyond. Although we are encouraged by strength in customer demand currently, we are closely monitoring volumes and forecasts and we remain conservative with regard to cash and our capital allocation decisions for investments in capital expenditures, acquisitions, people, and all other costs and expense. With that, I would like to turn it back to Dave for some final comments. Dave?

Thank you, John. We continue to see strong orders for truck and power sports with growing demand for industrials, utilities, packaging, and infrastructure solutions. As we think about capacity, not all work is created equal. We are focused and disciplined in our commitment to be purposeful in the utilization of our assets. Like all businesses right now, we are focused on profitability and asset utilization, while watching for signs of changing order forecasts. For the quarter, we will continue to diversify revenue by end markets to reduce the risk of concentration in a single customer or end market. This reduces the risk of one industry from significantly affecting our business and helps us stabilize our gross margin performance when the market does change. Our team continues evaluating internal factors to improve the efficiencies of our manufacturing processes so that we maintain a culture and discipline of continuous improvement within our organization. We are investing more in automation and the speed at which we can process materials. We're also making steady progress on our sustainability efforts. We will publish our first sustainability report in Q1 of 2023, which will highlight some of the areas we are advancing. Every day we make choices in our lives that affect the environment, the climate, and other species. If we can make decisions each day that help make a better future, we believe that these incremental changes will create a powerful flywheel effect for our families and our communities. Last quarter, I shared that in our packaging category, we were partnered with the design and manufacture of containers for a customer to grow millions of crickets that can serve as protein rich food for countries that are underserved or as a base for animal food. I'm happy to report that this automated cricket farm is in full production and we are meeting the customer's ramp up volumes today. We're also focused on energy savings projects, utilizing state funded energy and thermal audits to scope projects that improve the power factor in our plants, which will reduce the electricity consumption in our larger locations. I do want to reiterate what John said about cash and our capital allocation strategy. As we prepare budgets and look at our three-year strategic plan, we are carefully evaluating how best to use cash for long-term value creation. And although we are pleased with our record sales and optimistic about the growth potential for some of our newer end markets, we plan to remain cautious and disciplined with our capital allocation strategy. This means that we will continue to monitor cash, value creation, and our return profile, especially as the macro environment change. Before we open for questions, I want to thank our entire core molding team for their hard work and dedication through another challenging and successful year. Simply stated, I'm a proud member of a great team. I believe most businesses would say the last couple of years have been challenging as we navigated through COVID, rapid inflation, and more recently the weaknesses in the overall global supply chain. It has been challenging to produce strong results and I want to commend our team for staying focused and alert, while continuing to execute and move the business forward. We are fortunate of course to have strong cooperative teams that put excellence and diligence at the center. John and I want to continue to also thank analysts and investors for their support, and we welcome your questions either on the earnings call today or in a follow-up call to answer all your questions. With that, I'd like to open up the line for questions. Operator?

[Operator Instructions] And our first question here will come from Chip Moore with EF Hutton. Please go ahead.

Hey, good morning, Dave. John, thanks for taking the question.

How are you doing, Chip?

Good morning.

Good. Good. I wanted to ask about gross margins. You talked about mix shift and some of the production inefficiencies. Can you maybe help us understand that impact a little better? And then it sounds like in addition to seasonality there was maybe a little bit more demand on the trucking side. So, just remind us how that seasonality should work and then also just any raw material cost recovery impacts take into account on margins as well?

We have a normal seasonality to where we would see the Q3, Q4 where we have a majority of our sales into maybe margins that aren't as high on some of our products. So, really, [mainly mixed revenue] [ph], you'll see that in our history as well. Q1, Q2 will always be our higher margin relative to the business. I think when we look at Q3 in particular, it's about 270 basis points for Q3. The majority of that being product mix as you saw in the percent of sales. Some of that we do have some operational inefficiencies. We have some large launches in one of our plants. And then the other plant, when John talked about some of the infrastructure, it's really looking at some of the large facilities in that plant like the electrical systems, the steam systems, and the press systems.

Yes. And Chip, I'll address here on raw materials. You'll notice that what's happening in raw materials we’re kind of actually at that point year-over-year where we're starting to get some comps, some comparability from quarter-to-quarter. I know last year third quarter, we just started getting something comps. We're still getting significant recovery. We actually have recovery mechanisms in place for the most part all of our business, either formally or informally and we're recovering. What we're starting to see now though is that I've got ups and downs certain raw materials are starting to go down in price. And so, as part of the raw material recovery, we actually have some revenue decreases to certain customers as that happens. And at the same time, we have revenue increases for other raw materials. The other thing that we're seeing at least right now is the raw materials are starting to stabilize as of right now. We saw some pretty big increases early in the year, but most of our raw materials have now come to a little bit more of a stable and hopefully maybe even start to decrease a little bit. Some of steel prices and stuff like that that we pay on hardware should hopefully reset early next year as steel prices kind of zoomed up earlier this year and now come back to earth. So, we'll start maybe seeing some of that. And so, I really think where our revenues are going to be and gross margins, we're going to see less effect of raw material recoveries being a factor in the gross margin numbers because I think they're just stabilizing a little bit at this point.

And I think the challenge, I think as we talked before, is that the acceleration of the increase and the decrease was really a challenge, especially on the upside of that.

Got it. That's helpful guys. And then I want to ask, you added some more net new business in the quarter. Can you talk about, sort of where that lies? Is that – can you diversify into new areas. And then also on CapEx, I think right here maybe one more press coming in this year. So, just remind us on where that stands and some of the automation and what we should expect?

On the net new wins, a little over 50% of that, we would say that's in industrial and utilities. The rest of – part of that would be in heavy truck.

So, heavy truck and marine has a little bit also for the year. So, when you say for the $24 million for the year, about 4 million of it is transportation truck. So, what 15%, the rest is mix between last mile delivery little ConAg, little power sports, utilities, those types of things. And so, we continue to see diversification with the net new wins being a little bit less truck. And again, I think one of the things that we see on is that there's still good truck business out there. So, we're going to win some good new truck business that makes sense that – and so we'll always go for the stuff that makes sense there. It's just some of the other stuff we're probably higher focused on because just the margins are a little bit better on those.

Got it. Perfect. Makes sense. So, maybe just one more for me. Just bigger picture, kind of talk about the macro and being a little cautious, appropriately cautious and monitoring things. I guess at this point where would you typically get more visibility from customers at this point in the year and just given where you're bumping up against capacity constraints, when would you potentially consider adding capacity or just given the potential macro slowdown that's where you're going to be more cautious near-term? Thanks guys.

Yes, I think when we look at next year, we obviously – same as everyone else, we anticipate some type of a decline in the revenue right now. We're not really seeing that. We see still continued increase and strong demand in the truck. We would expect to see it first and probably personal watercraft, ATV, more discretionary spends. We would expect to start seeing that maybe by the end of the year beginning of the first quarter, but we're going to be cautious about moving forward relative to investing in new capacity. I think with the four machines that we've installed this year, we have enough capacity at least until we grow, until we see more growth going into the end of next year.

Got it. Great. All right. Thanks very much.

Yes. I think the big thing too is we're being a lot more selective on the growth where we decide to grow and what we're deciding to grow in. Year before, we had 75 million in net new wins and we probably got to hit 75 million in net new wins again this year, but being able to install that capacity, launch it and have it all at the same level of value is probably we're focused more on the value of the new business.

Yes. And risk profile, sounds like you feel very good. All right. Thanks.

Exactly.

Our next question will come from Mike Hughes with SGF Capital. Please go ahead.

Yes, thanks for taking my questions. Just on the program inefficiencies and launch costs, can you put a finer point on that if possible and quantify the hit to gross margins in the quarter from those issues?

Yes. It's really tough because what will happen is, during a launch you got kind of inefficiencies that happen throughout plant. So, we've always tried to grab it and say, hey, we know, you can measure some scrap in those things, but it causes a significant launch. We'll usually create inefficiencies throughout all types of jobs and all of a sudden everybody's focused on a bond or that's not bonding, right. And so, you are not really working as much on just your normal day to day stuff. And so, it really has a way to disrupt the whole facility. The nice thing about those is usually can kind of get cleaned up in about a six-month period. What we say is with a major launch, you got that six-month period where you're really working through bond or issues or scrap issues or where do you place the charge pattern and all those things and you get worked out eventually and you get your normalization back into the plant. And so, we would hope to see that impact from that launch would be really, kind of in Q1 next year would start to disappear the impact of it. On the other facility that we talk about. Again, we don't really break out the individual piece. We do believe that the inefficiencies out there, I think you'll see in the 10-Q, we had inefficiencies and mix of versus last year of another 270 basis points. I think we really believe if we can get that plant, once we get that plant, kind of reworked and working well. But I’m not going to give a number out there, but it definitely will show up in the margin. It won't be something so small, it would be a point or something, or a 10 basis points. It’s going to be something that will show up on the margins as we keep working through that. And so, we would expect as we fix that. We would see our margins start to head back up towards the mid-teens to high-teens as we get through that and we launch other products.

Yes. I think one of the challenges you get into as you know on any launch, customer has challenges, they'll stop production, start production back-up, some of the supply base that maybe the customer put in place has challenges. So, and it's working through all that. It's not just say a plant operational necessarily.

Okay. So John, just to follow-up on your comments. So, once this – it sounds like it's concentrating this one plant. Once that plant's running more efficiently, you can recover 200 basis points to 300 basis points of gross margin just from that alone. Is that correct?

Yes. So, I mean, what we would be saying is, I think we're at [13 today] [ph]. I mean, our goal is that we get back to that 15% to 20%. I think with the one facility that we get the stabilization from the launch and then the other one where we get through and work through the issues we're having there. Again, that would be our goal to be back in that 15% to 18% range. And so, you got mix that will come in every quarter and those types of things, but that would be the range that we would definitely be trying to head back towards.

Okay. And that launch, is it with a Class 8 existing customer?

Yes, it's a Class 8 customer, yes.

Okay, okay. And then you had a really strong tooling number in the quarter. In some respects, I guess, that could be a forward-looking indicator unless you're transferring business with an existing customer. So, how much of the tooling numbers related to new business?

Yes. So, during quarter. I know we had a couple of big ones. One is actually for a business that actually has launched during this quarter also. So, was definitely brand new. So, a good piece of that was for that piece that was launched during the quarter. And actually, when I say that both of them, both the two biggest ones were for all business that was launched. One was that Class 8 truck that we were talking about, which is new program. The other one was some stuff that is non-Class 8, but it was a new program also. So, both of those do – both of the majority of the stuff was definitely for future revenues or new revenues.

Okay. And then I think year to date $24 million in net new business wins in last year was 75 million. So that's just shy of $100 million in net new business wins. How much of that has launched already?

So, in Q3, it was about 10 million of that just in Q3 alone.

Yes, that's actually the revenues in Q3 from the launches. So, what will happen during these launches is, so when I go down my sheet here, majority of those programs have launched in some form, but what will happen is they will take multiple quarters to get up to speed, ramp up to speed, in those. And so, what we can tell is what we're tracking is that in Q3 we had about $10 million from of new revenues just for that quarter from programs that were out of that [75 in the 24] [ph].

Okay. So, if I annualize the 10 million that's $40 million that would leave an additional $59 million to launch, correct? And what's a timeframe on that?

So, these will be launch or ramp, like I said, some of these are launched, but not ramped. And so again, what we would expect is that they would start ramping through the periods next year additionally. Now again, these were 75 million in 2024 of net new wins, when they were [one] [ph]. I'll be cautious on that number like I am on the rest of my business. I don't know what's going on with the Fed and what they're trying to do to slow down business. But I think it will impact all our business eventually from what they’ve said. So, I think you would definitely have the ramp and then there are several programs like I'm just going across my sheet here, four, five, six, seven of them that haven't even launched yet. So, they'll launch later this year, actually some will launch throughout next year as we have. I think my latest one is actually one launches in Q1 of 2025. I mean that's how far some of these programs can get out there just because major OEMs will award those programs that far ahead.

Okay. But I'm just thinking about your core business if it were to decline 10% next year on the current run rate, that's about $40 million. There's a potential that the launch is a ramp could offset that, right?

Yes.

Okay. And what's the margin look like on these launches and ramps that are ahead of you? Putting aside, you discussed the issue with the one big program that's having a little – some issues?

Yes. I mean, that's always our goal is to improving our margins as we move forward, whether that's with an engineered solution or in a different industry or being able to do a conversion from some traditional material. So, absolutely the main goal is to move further into the customer's design cycle and further integrated and a higher value solution.

Okay. Just two more quick questions for you. You were at a conference over the summer and I think you mentioned one large customer, you hadn't received the price recovery yet. So, have you received the price recovery on the raw materials from all your major customers at this point?

Yes, we have.

Okay. And then last question just on the [raws] [ph]. Polypropylene, the October pricing looks down about 20% from the average from the third quarter and polyethylene down about 6% from the third quarter average, as raws fall isn't there a little bit of lag where you'll benefit just like your hurt as they go up?

Yes. Unfortunately, all raw material adjustment costs aren't created equal, and we'll run them through that where we have some that move as fast as monthly, some move quarterly, some move every six months. So yes, we would expect a little bit of a lag. But I mean, I will tell you, some do move as fast as monthly that we will change prices monthly. But overall, that's what we would expect to see, you get something like benefit as those prices do fall.

Okay. And then just one follow-up on that. Fiberglass, I had read that there's going to be another price increase early next year, does that impact you or you have that locked in at this point?

We are locked on our major fiberglass other than they have an actual kind of adjuster clause that would move every six months and that one's driven more by energy, couple of raw materials that go into it, I can't remember exactly. So, the majority of it is really locked, but you can see probably moves of $0.03, $0.04, $0.05 per pound just based on that adjuster clause. So, that's locked. I will tell you that we're not fully locked and we're seeing that there might be some opportunities in glass otherwise, it's actually maybe a little bit lower priced that we might be able to get – take advantage of that some of the stuff coming out of China. Thanks to shipping rates coming down, those types of things have actually gotten a little bit more beneficial. But I will tell you that we still have the majority of our glass comes from North America. We just think that's the better supply chain right now, the more stable supply chain right now, but we can't get a little bit of benefit from buying some from China.

Okay. Thank you very much. Appreciate it.

[Operator Instructions] Our next question here will come from JP Geygan with Global Value Investment Corporation. Please go ahead.

Hey, good morning, gentlemen, and congratulations on a nice quarter. It's obvious to us, but your efforts to transform the business are bearing fruit.

Thanks, JP.

Thanks, JP.

And a couple more strategic questions this morning. Number one, you've been clear that you're adding new verticals to the business, which should help dampen some of the cyclicality we’ve historically seen with the Class 8 truck market, how should we be thinking about end customer demand in these verticals as we're starting to see signs of an economic slowdown?

I think when we start looking at infrastructure and utilities, especially, we're continuing to see an increased demand and there's a lot of excitement around the infrastructure build and how that's being divvied up. Things like fiber optics and communications have actually been translated just into the state's budget so that the state can then perform what they need to, sort of launching projects. Some of the other ones on maybe some of the stormwater drains relative to buildings, we might see some I guess, leveling off of that, but right now, what we see anything to do with fiber optics and communications, data transmission and then general infrastructure we're seeing an increase.

Great. Alright. You've alluded to discussions that you've had with customers about raw material price escalations and maybe more generally about negotiating more fair and balanced terms and conditions. Can you provide some more color on how these thoughts have progressed and how we should really think about [Ts and Cs] [ph] in the new contracts that you're announcing such as the contract with UFP?

Yes. And again, I'll use the statement again, not all customers have created equal either. And so, we do go through the Ts and Cs with different customers. We really understand our customers. There's just different levels of customer partnership and so some of the Ts and Cs will be different for others. What we are looking at is that we will have a raw material adjuster clause, some type of adjuster clause in every contract going forward. Some will be pretty easy negotiations, some will still be pretty tough negotiations, a person like UFP. Again, in the thermoplastics area with an index it's a pretty straightforward conversation and it happened very quickly. And so, I think that we'll continue to see that primarily in the thermoplastic areas, the thermostat guys will continue to have an RMA clause, but maybe a little bit probably more negotiation. And so, as we hit each of those negotiations, I think we've talked, we got several couple more negotiations coming up where we are getting raw materials, but we got new contracts coming up that we're going work through those with the customer and then try to make sure that we get probably a little bit more balanced contracts on some of those that maybe historically we were able to get.

I think it's a business model and a culture change for some customers. They've based their entire business model on set pricing and then being able to increase their pricing onto the end customer.

All right. Thanks for any additional color. Finally, as you begin to offer more solutions oriented or highly engineered products or solutions, how should we expect project level economics to develop over the life of a project and particularly as it relates to project ramp up costs or timing?

Yes. I mean, it definitely extends the timing if you're early in the design phase. It doesn't necessarily extend when we look at the quote, the cash when we look at the net new wins, because once they've decided to launch it, it's already – you're looking at the tooling at that point, but we definitely have more time and more resources involved being earlier in the design and development cycle. We're doing a lot more validation to federal requirements for loading and relative to the material and the product in itself.

And I would assume, but maybe you can confirm that that sort of early engagement really makes these contracts a bit more sticky?

Absolutely. I mean, if you're the only one that can provide that solution, I think some of our programs are very, very clear on that. I mean we're able to use two different processes to optimize a solution when we're the only supplier in the world that has those two processes to offer that solution.

Great. Thanks for taking my questions.

Thanks, JP.

Thanks JP.

This concludes our question-and-answer session. I'd like to turn the conference back over to Dave Duvall for any closing remarks.

Thank you for your continued interest in our company and we look forward to providing an update of our progress when we report fourth quarter results in a few months. Thank you.

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