Core Molding Technologies, Inc. (CMT) Q4 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the Core Molding Technologies Fourth Quarter and Fiscal Full-Year 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded today. I would now like to turn the call over to Sandy Martin with 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 fourth quarter and full-year results for 2022. Joining me on the call today are Core Molding's President and CEO, Dave Duvall; and the company's EVP & CFO, John Zimmer. 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 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. 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 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. 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 now, I would like to turn the call over to Dave Duvall. Dave?

Thank you, Sandy. Good morning, and welcome to our fourth quarter and full-year earnings call. I'd like to start by congratulating our teams across the company for a year of record-breaking great performance. It's exciting to see our clear business strategy and focus on people, processes, and execution, is gaining momentum. As always, this is best demonstrated in the results of the game. We had a year of record-breaking by the Core Molding team. We had record-breaking revenue at $377 million, a 23% increase from prior year, record-breaking EBITDA at $32 million, and record-breaking net income of $12.2 million. Thank you to the entire Core Molding team for making this happen. You can see and feel the difference as we continually improve, build, and institutionalize our business, organizational, and operational systems. The process of improvement is never complete, and we still have many opportunities for improvement, but what is important is that we are a winning team, and we are seeing this accelerate, which is demonstrated by continually improving results. This is exciting and rewarding for all of us at Core Molding. So, thank you again to the entire Core Molding team for all the hard work that went into making this happen. Before we dive deeper into our results and outlook for this year, I first want to review a few other important 2022 achievements. We are excited and proud to announce the launch of Core Molding's first sustainability report by the end of this month. Many people contributed to this major endeavor, but a special thanks goes to Marshall Starr, our sustainability leader, who spearheaded this project and will continue to drive progress on our efforts moving forward. We continue to invest in our people and organizational capabilities. We graduated 16 more people from our year-long management leadership training program, and implemented a frontline leader training program. We launched an online technical and engineering training program to leverage the knowledge of our core subject-matter-experts, and further institutionalize their knowledge. The results of these efforts, and many, many more, are seen in internal promotions, which account for over 30% of our outstanding positions in 2022. In addition, we recently made a strategic decision to hire Michael Gayford as our Vice President Of Operations, to help our team accelerate our operational excellence program throughout our operations. John and I will cover this more in a few minutes. Also, we have continued our partnership with the Center for Design and Manufacturing Excellence, and expanded our technical internship program to a total of six colleges and universities. In summary, we fully understand that recruiting, retaining, and developing a highly motivated and knowledgeable team, is a competitive advantage, and quite simply, the most important factor in driving future success. Entering 2023, custom demand remains strong, and we are closely monitoring forecasted business for impacts of macroeconomic events and monetary policy changes. As our available excess capacity tightened in 2022, we were more selective on new business, and focused on winning programs that better align with our margin goals. This means that we need to remain disciplined and potentially pass on lower return programs. We are bullish on our long-term potential in the industries we serve, and we are evaluating growth opportunities in the future through acquisition for the addition of new capacity. We remain disciplined in advancing our business transformation through a combination of sales growth, enhanced margins, improved plan efficiencies, and maintaining a return on capital employed, consistent with our long-term goals. We continue to drive our industry diversification strategy in 2022, and we saw meaningful growth in our power sports and industrial utilities industries. Increased demand in our truck market, combined with our ability to recover material costs, drove truck revenue to 45% from 41% in 2021 as a percent of product sales. Our current industry mix provides us with a solid platform to continue winning new business with customers needing a technical solution, and supporting existing customers with composite solutions from design and development to launch. We are especially encouraged by our expansion of industrial, utilities, and packaging verticals, where we see long-term growth trends. For 2023, our technical solutions teams are continuing to be selective and will be diligent about growing sales, utilizing our capacity and resources with the highest value industries, and opportunities that benefit from our engineered material solutions and conversions. Turning to a few comments about the fourth quarter, we continued to see a substantial progress in product launches during Q4. Product sales represent new wins in 2022 and 2021 that are now in production. We reported strong fourth quarter increases in product sales of 22% versus Q4 of ‘21. We continue to launch programs in the industrials and utilities categories, specifically a number of projects related to storm water solutions, flush covers, and in-ground vault products, along with other industrial utilities projects that we expect to be in full production by Q3 of this year. We are excited about these launches because they represent growing end markets where we have created engineering solutions that provide a unique solution to our customers. Each of these projects are important because they drive margin enhancements and customer confidence in Core Molding, as well as improved performance, lower cost, and reduced complexity for our customers. 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. Before I go through our quarter and full-year results, I wanted to discuss changes to our long-term tax structure resulting from the company's business transformation. In the fourth quarter of 2022, we completed an analysis of the value each plant receives from our integrated operating systems, integrated sales, and corporate engineering solutions group, and determined the appropriate charge for each plant. The timing of this analysis directly related to us completing integration of all of our plants. Completion of this integration took several years due to the company's operational turnaround, the impacts of COVID, and supply chain challenges that took priority. As a result of the analysis, the company's tax structure is more reflective of the value received by each plant. As a result, in Q4 of 2022, the company was able to release tax-related allowance reserves of $2.4 million from previous years net operating losses. We expect to utilize the net operating losses over the next three years. With the new structure, we expect the company's effective tax rate will be in the mid to upper 20% range, depending on the mix of our business. Now turning to our results, fourth quarter 2022 net sales totaled $86.4 million, up 18.1% versus a year ago. And as Dave mentioned, product sales increased 22% versus the prior year period. Revenue increases were largely driven by higher customer demand in our truck and power sports industries, price increases, and new program launches. Gross profit for the fourth quarter was $11.5 million or 13.4% of sales compared to $8.5 million or 11.6% of sales in the prior year quarter. During the quarter, we worked to further stabilize margins, and we are pleased to report that most material prices have leveled out, with some material prices even decreasing, and supply chains are stable. Selling, general, and administrative expenses for the quarter were $8.6 million compared to $6.5 million in the prior year period. The increase was primarily due to higher labor and benefit costs, including short-term incentive costs related to the strong year-over-year financial performance, and higher professional fees as we transition certain information technology applications to third-party providers to improve our information capabilities and our cybersecurity risk management. In the fourth quarter, the company reported operating income of $3 million. We recognized a tax benefit of $2.4 million related to the release of NOL valuation reserves from the tax structure discussed earlier. Q4 net income aggregated $4.8 million or $0.57 per share compared to 2021 fourth quarter net income of $441,000 or $0.05 per share. Adjusted EBITDA for the quarter was $6.1 million or 7% of sales, compared to $4.9 million of adjusted EBITDA in the 2021 fourth quarter, or 6.8% of sales. You can find the GAAP to non-GAAP reconciliation tables at the end of our press release for both the fourth quarter and year-to-date numbers discussed today. Now, turning to our strong 2022 full-year results. Net sales totaled $377.4 million, up 22.7% versus a year ago, and product sales increased 26.3% versus the prior year period. Sales increases were largely driven by solid customer demand, especially from heavy-duty truck and power sports, price inflation recoveries, and new program launches. Gross profit for the 12 months was $52.4 million or 13.9% of sales, compared to $41.3 million or 13.4% of sales in fiscal 2021. Gross margins were impacted by favorable net selling prices in excess of raw material cost increases, somewhat offset by unfavorable product mix and production efficiencies. The company has made progress improving operational inefficiencies, and has set goals for additional improvements in 2023. Dave will go through operational imperatives related to our manufacturing facilities in a few moments. SG&A costs for the year were $34.4 million compared to $30.3 million or $27.7 million excluding plant closure costs in the prior year period. The growth in SG&A for the full-year is consistent with the growth in the fourth quarter. For the year, short-term incentive costs increased $1.1 million, which is a large contributor to SG&A growth and is directly correlated to our financial performance. Full-year 2022 operating income was $18 million, and looking below the operating income line, we recorded a $1.6 million loss based on early extinguishment of debt from refinancing work completed in the summer of 2022. For the full year, our income tax expense is $2.4 million, which included a tax benefit of $2.4 million due to the change in our tax structure discussed earlier. 2022 net income was $12.2 million or $1.44 per share, compared to net income of $4.7 million or $0.55 per share in the prior year. Finally, full-year adjusted EBITDA was $31.9 million or 8.5% of sales compared to $26.7 million or 8.7% of sales in 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 $19 million for the 12 months ended December 31, 2022, and capital expenditures for the year were $16.6 million. The 2022 CapEx included $8.8 million or 53% of total CapEx spend on capacity expansion and automation investments. We estimate that our capital spending in 2023 will be approximately $13 million. At December 31, 2022, the company had available liquidity of $52.3 million, which included a combination of cash, cash equivalents, and availability on the revolver and capital credit lines. The company also had term debt of $24.2 million at the end of December, and our debt to trailing 12 months EBITDA ratio was less than one times adjusted EBITDA at year-end. The company's working capital investment is well managed at $30 million as of December 31, 2022. We ended the year with accounts receivable of $44.3 million, and a DSO of 46 days. Inventories are well controlled and down compared to year-end 2021 levels, and we achieved our goal of having our accounts payable be at least one times our inventory level. Our return on capital employed, a pre-tax return metric, improved to 12.7% on an annualized basis, which signals a disciplined use of capital. We plan to strategically manage our capital allocation decisions in a prudent manner, and believe that are liquidity and strong balance sheet, provides the company with flexibility to fund our growth plans. During 2022 and in 2023, our strategic business transformation continues, and we are focused on increasing profitability through operational continuous improvements. Our operational performance improvement goals target to enhanced gross margins through better efficiencies. Improving efficiencies on the production floor also will increase capacity as we improve throughput of our assets, which drives higher returns on capital employed. We are dedicated to core strategic growth and profitability goals, with programs to drive long-term value creation in 2023 and beyond. With that, I would like to turn the call back over to Dave for some final comments. Dave?

Thank you, John. We were pleased to recognize our first Core Molding plan to reach over $100 million in annual sales during 2022, another record. This is an awesome accomplishment, and this milestone helps us gauge future growth in each of our plants. As John mentioned, we are strategically focused on improving operational performance, and specifically improving the productivity and profitability at all of our operations to carry this momentum forward. As I mentioned, we hired Mike Gayford to lead and support our operational teams in the United States. Just like price recovery was a must-win battle for 2022, our must-win battle for 2023 is to fully embed our operational excellence processes in our operations. We estimate that this will increase our capacity by 20% in some of our underperforming plants, and it better enables our solution sales approach. For our solution sales delivery to be effective, we require a high level of performance and capabilities from all of our processes. We've made significant productivity and capacity improvements, but we have known opportunities to continue driving additional improvements. When we discuss throughput, we also know that embedded in this metric are labor productivity, overhead spending, scrap, and operational efficiencies. We have put key processes in place to calculate our successes, and these improvements are our number one goal this year. It is a must-win battle for our company. As we've discussed in the past, we're continually automating and applying robotics to reduce costs, increase throughput, and improve efficiencies. We focus on profitability and asset utilization, while monitoring changing order forecasts. For Core, we will continue to diversify revenue by end markets and reduce concentration risks in both customers and industries. Our dedication and work here will significantly affect our business of further stabilizing and growing gross margins, especially as we expand the business. As we continue to focus on operational improvements, the board made the strategic decision that starting in 2023, a portion of our long-term incentive plan awards will become directly tied to future operational financial performance. At the March 9th board meeting, to further align executive compensation with our shareholders, our board approved the transition to restricted grant awards for our senior leadership team from being solely time-vested to becoming 50% performance-based over the next three years. As the performance shares cliff-vest in three years based on performance, there would've been an immediate hit to our senior leadership's annual compensation over the next three years. Therefore, the board decided to transition the long-term incentive plan by having performance shares be 10%, 30%, and then 50% over the total share awards over the next three years. The board granted the company's 2023 annual share awards, and set the three-year performance targets on March 10th, which includes the first performance-based shares. As I mentioned at the beginning, we are publishing our inaugural sustainability report for Core later this month, which will highlight all of the ES&G areas that we are advancing. Work has been done in regards to our benchmarking, scorecard, and disclosures, and I'm proud of our team for getting us to this point in our corporate social responsibility journey. We will always have much to do, but we have a solid foundation, a committed team of professionals, and a clearly defined path to continually improve our business and achieve our goals. We also continue to seek out new projects that strengthen our environmental stewardship, reduce waste and greenhouse gas emissions, support local communities, and the health of our oceans. Core is committed to advancing our work in this area, and I believe you will see that in our inaugural sustainability report later this month. Our 2023 outlook is optimistic based on our robust demand we currently see and from discussions with our customers. We recently won a major UTV program, which is a part of the power sports industry. Our UTV and personal watercraft customer demand remains strong through the first half. In addition, we are continuing to develop work for large industrial and infrastructure companies, as well as automotive and truck companies. Building supply demand for residential consumers through big box retailers has been under some pressure in recent weeks, but that could be somewhat temporary or seasonal, and we will continue to carefully watch all industries that we serve. We are pleased with our 2022 results, and remain optimistic about the future growth potential for our end markets. We plan to remain cautious and disciplined with our capital allocation strategy. This means that we will continue to monitor cash, our return profile, and long-term value creation, especially as macro changes impact businesses. We want to thank our analysts and investors and prospective investors for their time and attention. We want to welcome your questions either on the earnings call today or on a follow-up call to answer all of your questions. With that, I'd like to open up the line for questions. Operator?

[Operator Instructions] Our first question is from Chip Moore with EF Hutton. Please go ahead.

Good morning. Hey, Dave. John, congratulations on the great year. Yes, great job. I wanted to ask about the $500 million longer-term goal. Maybe you could expand a little bit on the potential path there. Dave, you talked about, I think some plants being able to increase their capacity by 20%. Do you think you can get there with your current footprint? Just do you contemplate maybe any M&A or investment in that to get there, or how do you think about that?

Yes. Right now, we wouldn't be able to get to $500 million with our current footprint. We'd probably get close, and it would depend on the work, the type of work that we're bringing in. Right now, part of when we talk about the must-win battle, we know that we have some older presses where we need to do some work and we have known opportunities. So, we estimate a 20% improvement in overall throughput in those, which would essentially get you - it's about 20 machines in those two plants that would get you about four presses. So, really getting the operational system in place, getting the plants operating at the highest level possible before doing acquisition, is really in preparation as we start looking forward into next year on what we would do, whether that would be brick and mortar or an acquisition.

Got it. That's helpful. And in terms of that timeline, you think that's sort of a 12 to 18-month process to optimize those assets, or how do you think about that timeline?

We better be faster than that. Our goal is to have it this year. I mean, to me, you're looking at six to nine months with - if I draw a linear curve, finishing it in say nine, 10 months. We'll be getting improvements all along.

Yes. Chip, the one thing that - knowing our business is, we - kind of our programs that we're launching today were won probably about a year ago, maybe 18 months ago. And so, as we open up that capacity, what we're looking to do is making sure that we're ready to sell today for what needs to be sold or launched next year at some time. So, that's the reason it's really critical, as Dave said, to get that capacity open today. So, we feel very comfortable that we can go ahead and sell it.

That's, yes, perfect. And I guess to that point, visibility further out, I think, right, you've got some programs launching even into ‘25 at this point. And so, how is that aligning, I guess, with expansion? It sounds like pretty well. And then maybe you can talk about the opportunity pipeline in general.

Yes, I mean, right now, we're probably - like we said, we're probably being more selective with some of the business just because we've taken on - we have, what, $75 million two years ago, and a lot of that's coming into the launch phase, putting that in. So, we’ve got to be a little more selective on where we do have the capacity and we don't. But we definitely look at when programs will be ending and when we want to bring in new programs for that. We are seeing - I think more than half of our wins in Q4 were in the utility section.

Okay, great. And maybe if I can do one last one just on that CapEx. I think it was $13 million this year. Where is that going, particularly in terms of capacity versus new programs and things like that? Thank you.

Yes, the majority of that is going to be sustaining, but sustaining in a way that you will get additional capacity. Again, as Dave made a comment about as we improve our throughput, but we also change controls on equipment, those types of things, what will end up happening when you change controls is that you'll get a press that goes up and down faster, more stable, those types of things. And so, the last couple of years, we've done some pretty good capacity expansion. I think during this past year, we obviously added three presses over the last - four presses over the last two years. And so, I think this year is more of a focus on how do we make sure that we've got the sustainable or sustaining CapEx being spent, make sure the business stays very stable, those types of things.

Yes. Maybe one point, Chip, to elaborate a little more on your prior question. When we talk about getting the operational to a high level and really gaining the capacity out of what we know that we can do and getting operational systems in place, a lot of that really is preparing when you start looking at expanding so that when you do an acquisition, you're able to come in and put the operational systems in and integrate them as quickly as possible.

Yes, makes sense.

Yes. Fix yourself before you try fixing somebody else.

That's right. All right. Thanks very much. I appreciate it.

[Operator instructions]. Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Dave Duvall for any closing remarks.

Good. Thank you for your continued interest in our company, and we do look forward to providing an update of our progress when we report first quarter results in a couple of months. Thank you, everyone.

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