In the recent earnings call for the fourth quarter of the fiscal year 2023, The Eastern Company (EML) CEO Mark Hernandez outlined the company's performance and future strategies. Despite a decrease in net sales due to lower demand, The Eastern Company saw an improvement in gross margins and a reduction in debt and working capital requirements.
The company has made strides in returning capital to shareholders, completing acquisitions, and enhancing vertical integration. Looking ahead, The Eastern Company aims to achieve organic growth and further margin improvements in 2024, with a long-term goal of reaching 30% gross margins.
Key Takeaways
- The Eastern Company reported improved gross margins, earnings from operations, and cash flow in 2023.
- Net sales decreased in Q4 2023, attributed to lower demand, but gross margin improved.
- The company reduced debt and working capital requirements, invested in the business, and returned capital to shareholders.
- The Eastern Company is focusing on electrification, internal combustion engines, digitization, and automation to align with sustainable mobility trends.
- Plans to pursue smaller vertical acquisitions to boost operations and revenue are in place.
- The company faced challenges in aligning with the One Eastern strategy and encountered one-time expenses in selling and administrative expenses.
- A long-term goal of 30% gross margins is set, with confidence in future opportunities for growth despite a seasonal decline in backlog and headwinds in the commercial vehicle industry.
Company Outlook
- The Eastern Company anticipates organic growth, acquisitions, and continued improvements in gross margins for 2024.
- Executives expect the current headwinds to stabilize or decrease, potentially due to lower interest rates.
- An update on progress is planned after Q1.
Bearish Highlights
- The decrease in net sales for Q4 2023 was linked to supply chain normalization and industry headwinds.
- A decline in the backlog of orders was noted, resulting from seasonal patterns and fewer working days in Q4.
- One-time selling and administrative expenses impacted earnings.
Bullish Highlights
- The company's capabilities in electrification, digitization, and automation are well-aligned with the sustainable mobility trend.
- Improved gross margins through cost reduction and vertical integration efforts were highlighted.
- Confidence in the company's strategic direction and long-term growth was expressed.
Misses
- The fourth quarter saw a decline in net sales and backlog due to seasonal factors and industry challenges.
- The LIFO (Last In, First Out) accounting adjustment was mentioned as not being a significant factor in gross margin calculations.
Q&A Highlights
- The company will provide further updates on their strategic progress after the first quarter.
- Executives remain confident in their strategy despite the seasonal decline in the backlog and normalization of supply chains.
The Eastern Company's mixed results in the fourth quarter reflect the company's resilience in improving operational efficiency and profitability amid industry challenges. The company's strategic focus on electrification and automation, coupled with its financial discipline, positions it well for potential growth in the coming year. The Eastern Company's commitment to shareholder value through capital returns and strategic acquisitions remains a cornerstone of its business approach as it navigates the evolving market landscape.
InvestingPro Insights
In light of The Eastern Company's recent earnings call, InvestingPro data and tips offer additional context for investors considering the company's stock. The Eastern Company has exhibited a significant return over the last week, with a 7.69% price total return, reflecting positive market reception to recent developments. Additionally, the company's commitment to shareholder value is underscored by a high shareholder yield, as it has maintained dividend payments for 54 consecutive years, a testament to its financial stability and consistent performance.
InvestingPro data further reveals that The Eastern Company is trading near its 52-week high, at 99.01% of the peak value, indicating strong investor confidence. The company's market capitalization stands at 161.66 million USD, with a Price/Earnings (P/E) ratio of 18.51, which adjusts slightly to 18.83 when looking at the last twelve months as of Q4 2023. This P/E ratio suggests a moderate valuation relative to earnings.
Investors may also find it encouraging that The Eastern Company's liquid assets exceed its short-term obligations, highlighting a solid liquidity position that could support ongoing operations and strategic initiatives. This financial health is crucial for the company as it focuses on electrification, internal combustion engines, digitization, and automation to align with sustainable mobility trends.
For those interested in a deeper analysis, InvestingPro offers additional tips on The Eastern Company's performance and prospects. By using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to a wealth of insights, including 6 more InvestingPro Tips that could further inform investment decisions. Visit https://www.investing.com/pro/EML to explore these exclusive tips and leverage the insights from InvestingPro for a well-rounded investment strategy.
Full transcript - The Eastern Company (EML) Q4 2023:
Operator: Greetings. And welcome to The Eastern Company’s Fourth Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Ernie Hawkins (NASDAQ:HWKN). Sir, you may begin.
Ernie Hawkins: Thank you. Good morning. And thank you everyone for joining us this morning for a review of Eastern’s results for the fourth quarter and full year of 2023. With me on the call are Eastern’s President and CEO, Mark Hernandez; and Eastern’s CFO, Nicholas Vlahos. We 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 10-K filed with the SEC on March 12, 2024, for the fiscal year 2023. 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 an 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 that introduction, I will turn the call over to Mark.
Mark Hernandez: Thank you, Ernie. Good morning to those who joined us by phone and those participating via the web. It's an absolute pleasure to be speaking with you today after a year of realignment and continuous improvement during which we focused on our core operations for long-term growth and shareholder value creation. As you know, since I became CEO in January 2023, we've been following four fundamental strategies; disciplined operations, effective capital utilization, focused commercial business and value adding acquisitions. To those four pillars, we recently added a key overlying component we call One Eastern to help us capture the many synergies that exist between our three business operations. During 2023, our determined application of Eastern strategies produced increasingly strong results as 2023 progressed. For the full year, we boosted our gross margins by 280 basis points from 21% in 2022 to 23.8% in 2023 through on shoring, pricing increases and cost recovery actions. Earnings from operations improved continuously each quarter, culminating in earnings per share of $0.57 in the fourth quarter of 2023 compared to $0.03 in last year's period. We achieved these results while dealing with the lingering impacts of troubled supply chains with customers reducing their inventory levels as global supply chain finally returned to its pre-pandemic state and with high inflation that hadn't been experienced for several decades. In addition to improving quality and consistency of our earnings, we brought down past due deliveries and past due order backlog. And we ended the year with working capital as a percentage of sales of 25.6% compared to 26.1% in 2022. By reducing working capital requirements and generating cash flow from continuing operations, we brought down debt by more than $20 million. Cash flow from operations improved to $26.5 million in 2023 compared to $7.4 million last year and our balance sheet strengthened commensurate. While achieving these results, we continued investing in our company and returning capital to shareholders. During 2023, we streamlined Eastern operations, consolidating our focus on North America and in an example of vertical integration, we bought certain assets of SureFlex Incorporated to expand Velvac production capabilities. We also maintained Eastern's long standing dividend program and repurchased 40,000 shares or approximately 0.6% of the company stock. In 2023, our transformation strategy delivered strong early results and we expect to drive further improvements in 2024. We now have a solid operational foundation. We need to consider revenue enhancing acquisitions that will help Eastern grow and vertical integration initiatives that will support gross margin improvements. Before I outline our approach for this year, I'll turn the call over to Nick for a quick review of the fourth quarter 2023 financial results. Nick?
Nicholas Vlahos: Thank you, Mark, and good morning, everyone. As Mark said, I'll run through our financial results for the fourth quarter of 2023. For the period, net sales decreased 3% to $67 million from $69.1 million in the 2022 period, primarily due to lower demand for truck accessories and returnable transport packaging products amidst the normalization of the global supply chain. In the fourth quarter, we strengthened our backlog as a whole while at the same time reducing our past due backlog. Our backlog as of December 30, 2023 increased 10.5% to $80 million from $72.5 million on December 31, 2022, reflecting an increase at Big 3 for mold services and returnable packaging, an increase related to the launch of a new mirror program for Class 8 trucks at Velvac. Gross margin as a percentage of sales in the fourth quarter was 26.8% compared to 16.6% in the 2022 period. The increase in margin primarily reflects lower material and freight costs, improved pricing and a favorable adjustment to the life of reserve in the fourth quarter of 2023 combined with other inventory write offs in the 2022 period. As a percentage of net sales, product development expenses were 2% compared to 1.5% for last year's fourth quarter. Selling and administrative expenses increased $1.9 million or 19.9% for the fourth quarter of 2023. The increase was primarily due to higher payroll and payroll related expenses, legal and professional and selling costs. Other income and expense in the fourth quarter of 2023 decreased $3.2 million compared to the 2022 period. The decrease primarily reflected an unfavorable $1.1 million pension adjustment and various other items. Net income for the fourth quarter of 2023 increased to $3.5 million or $0.56 per diluted share from $0.2 million or $0.03 per diluted share in the 2022 period. In the fourth quarter of 2022, net income was negatively impacted by restructuring costs of $0.5 million net of tax related to a warehouse consolidation into Eberhard. Adjusted EBITDA for continuing operations, a non-GAAP measure for the fourth quarter of 2023 was $7.2 million compared to $3.3 million for the fourth quarter of 2022. In 2023, we increased our cash flow from operations by $19 million when compared to 2022. The improvement reflects a reduction in cash used to support working capital, primarily a $5.3 million decrease in inventory. In 2023, we reduced our accounts receivable days to 48 days from 56 days in 2022. By comparison, last year cash was primarily used to ensure the availability of inventory to meet customer demand in light of the supply chain constraints. With this cash flow, we paid down $5 million of debt during the fourth quarter and $20 million for the full year. This is a record level of debt paydown for Eastern. At the end of the fourth quarter, our senior net leverage ratio was 1.41 to 1, down from 2.27 at the end of 2022. In addition, we invested $6.4 million in capital expenditures and paid dividends of $2.8 million in 2023. That completes my financial review. I'll now turn the call back to Mark.
Mark Hernandez: Thanks, Nick. At this point, I'll turn to our plans for 2024 and beyond. First and foremost, we are going to continue to focus on delivering consistent performance through our proven strategy of disciplined operations, effective capital utilization, focused commercial business and value added acquisitions, all under the umbrella of One Eastern. The difference between today and our fourth quarter call last year and it's important one, is that we now have a solid foundation of reliable earnings from operating activities to build on. The foundation positions us to continue driving earnings and cash flow, paying down debt and as I mentioned earlier to seriously considering and pursuing M&A opportunities that accelerate our objectives, while continuing to focus on vertical integration to drive margin increases. In 2024, we expect our goals to be aligned, aided by continued strong sales demand in the automotive and commercial vehicle markets. Organic growth activities through new products and market share improvement as well as acquisitions. Our confidence is supported by our $7.6 million increase in backlog as of year-end 2023 to $80.1 million. This increase took place even as the global supply chain normalized. Customers cut back on excess inventory and we reduced our past due backlog. It is a strong indication of the new orders we're generating, including Velvac's launch of the new mirror program for Class 8 trucks and for Big 3's mold services and returnable packaging. We have many initiatives underway to enhance our gross margins even further through reductions in product cost, concentrating on total landed cost through our vertical integration make versus buy strategies and spending rationalization efforts. In addition, we've taken steps to ensure we have the right culture and opportunities in place to enable our teammates who are Eastern's greatest resource to drive the company forward every day. We've created achievable plans for each of the three businesses, changed our structure to realize synergies across our despairing companies and strengthening our incentive system, so it properly rewards cross functional collaboration. Through these efforts, we are working to achieve more than what any one division is capable. We are also repositioning all three of our businesses and reviewing our global footprint, analyzing how to improve our assets and optimize Eastern's efficiency. At Eberhard, for example, we are enhancing our portfolio of electromechanical products, focusing on new geographies and sectors, including government, where we can expand our business. At Velvac, we are expanding our solutions for aftermarket in ways that will augment existing relationships. At Big 3, we are taking steps to leverage our metal fabrication and machining capabilities to increase performance. To sum up, we are committed to achieving operational excellence by focusing on Eastern's operating costs, quality, on time delivery and especially employee safety. We expect our company to continue to play a unique role in the industry that embraces the move to electrification, the rejuvenation of internal combustion engine market, digitization and automation. We believe our capabilities are closely aligned with sustainable mobility, whether it be internal combustion engine or electric. And through sustainable returnable packaging and commercial vehicle accessories that increased improvement in miles per gallon will result in increased miles per gallon by reducing wind resistance. With that overview, let's open the floor to questions.
Operator: Sorry, sir, I interrupted you. Please continue.
Ernie Hawkins: We'll take questions from the web first. We do have a few questions. First question, you grew gross margin by 280 basis points in 2023. How should we think about margin expansion in 2024? Is another 280 basis point expansion possible?
Mark Hernandez: As I mentioned on our previous calls, we have aspirational goals to always increase gross margins as far as we can extend them. And this is supplemented by our cost improvement efforts through One Eastern, utilizing One Eastern to lower or strengthen our position for purchasing, as well as vertical integration activities where we are bringing stuff in-house that we would normally pay outside services to other companies. So yes, I believe that we can continue this effort to grow gross margins.
Ernie Hawkins: Next question, as you get more active in M&A, what are your criteria in terms of size and profitability? Which business offers the most attractive opportunities?
Mark Hernandez: Well, like we started with SureFlex, we want to take the crawl, walk, run strategy going forward. We're looking for things first on the vertical acquisition space that are smaller in nature, but can help our operations currently that currently exist today and improve our gross margins as well as we're always looking for acquisitions that can add to our revenue enhancing capabilities and leverage the One Eastern strategy as we fold them into the Eastern company.
Ernie Hawkins: Next question. Mark, you've been CEO of Eastern for nearly a year. Can you share any learnings from the past year that you'd like to implement in the coming year?
Mark Hernandez: Well, it's been a year of learning for me personally, but putting strategies on paper are just half the story. It's actually the easier half to put a strategy on paper with the challenge that I've seen in learning I have is getting everybody on the same page to pull towards One Eastern. And we continue that effort. We've made significant progress, and that's what led to the launch of the One Eastern strategy. Now all of our companies are not only looking to win for themselves, but looking to win for Eastern.
Ernie Hawkins: Revenue is down when compared to the prior year quarter and prior year, while earnings have strengthened. How do you see this going forward?
Mark Hernandez: Well, I look at this in two levels, breaking up into two pieces. One is, as supply chains normalize, there was a reduction in just in -- I call just in case inventory, where our customers were buying extra inventory to protect themselves against the unreliable supply chains. So we see that resulted in our revenue as they cut back on their orders. I also see it as some headwinds that we know happened in the commercial vehicle industry as suppliers struggle to enhance the supply chain, so that the OEMs can increase their production levels to normal. And then that was coupled with some of the packaging solutions projects that are happening at the consumer packaging side not to be as robust as in previous years.
Ernie Hawkins: And our final question from the web. Were there any one time items in Q4 selling and administrative expenses?
Nicholas Vlahos: So I'll take that question, Ernie. Thank you. And so yes, there were onetime expenses in selling and administrative expenses for recruiting and consulting fees. And then comparing on a prior year basis as well, there was a positive adjustment prior year due to the removal of bonus accrual.
Ernie Hawkins: With that operator, we'll turn it back to you for any other questions from the audience.
Operator: [Operator Instructions] We have a question from Ross Davisson with Banneton Capital.
Ross Davisson: Just picking up on the gross margin question earlier and the information you provided, it sounds like as always there are some puts and takes on gross margin in the quarter with some things that are clearly ongoing like improved pricing that you've worked hard to change and the material and freight costs getting more favorable or less negative. But there's also things like the LIFO adjustment. As you think through those puts and takes, what should our expectation be for gross margin? I know and you just reiterated like a long-term goal always to step that up. But in the short-term, is the 26.8% from this quarter unusually high because some of those more temporary things like the LIFO? Or is that a target you think you can keep attaining as we look ahead to 2024?
Mark Hernandez: I stated in earlier earnings calls that our aspirational target is to get to 30% gross margins and that is a stake in the ground of what we hold ourselves to. The LIFO adjustments are things that are, I kind of call them outside of operational control. So we'll continue to take those adjustments as they come. However, from the operations side, we do believe that there is significant opportunity to grow our margins. We're not giving up on pricing, but as we have new products come to market, obviously, we're going to position them with focused commercial business strategy that yields us a gross margin that is acceptable to us and that we deserve. And then on the second piece, that pulls our whole point towards vertical acquisitions or CapEx investment that improves our ability instead of paying outside services companies or direct material companies to produce products that we are able and capable of producing ourselves through capital allocation or through mergers and acquisitions on the vertical acquisition side. We are very active in that space right now. And we see that there is a significant opportunity to get to that 30%, which is the first hurdle that we are trying to achieve.
Ross Davisson: And I guess just a quick follow-up on that, I mean, just to put a finer point on it. Is the LIFO adjustment in this quarter like a pretty meaningful piece of what allows you to hit that 26.8 or is it not? Like I'm just trying to get a sense of magnitude like should we not be surprised if when we don't have that in Q1 presumably there's a big step down?
Nicholas Vlahos: It won't be as a meaningful impact in the future.
Mark Hernandez: Yes. I was just going to add, as a percentage of gross margin, it's not as significant as the other opportunities that we're pursuing.
Ross Davisson: On the backlog, I understand it was up year-over-year, but it was down sequentially and I don't remember sort of the seasonality pattern you usually see. Is the decline from Q3, is that just seasonal? Is that the past due backlog that you talked about or yes, the past due backlog going down? Is it something else like I just want to double check if there's anything else that I should take away from the backlog ticking down like that from Q3?
Mark Hernandez: I have a lot of experience in commercial vehicles and Q3 tends to be the strong quarter for most of our commercial vehicle customers. And they focus on production to get units off of the assembly line and then they focus the fourth quarter on getting those units out of the factories to recognize revenue. So it would make sense and there is less working days in the fourth quarter. So there is not a need for to order parts to start up in 2023 as companies try to rationalize their expenses to improve their earnings. So it has a little bit of a cycle to it, but I didn't see it as significant as it has been in the past in my career.
Ross Davisson: And then just on the revenue, just to close it out here, I was, if you think about sort of some of the things you've worked through in 2023 with, the normalization in orders as your customers stopped through sort of stocking, having a buffer inventory, if you will. And also what you said about the truck OEMs not able to grow. Are we at the point now where those headwinds like on a quarterly basis are gone? Are you still kind of anniversarying some of that as you go into 2024, if that makes sense? I'm just trying to get a sense of like you obviously have a headwind as you kind of normalize in 2023. I'm curious does that headwind persisting in 2024 just because of timing or are we sort of through that?
Mark Hernandez: I would answer it this way, Ross, is that the headwinds aren't increasing. They're actually kind of stable and that's primarily driven by interest rates. With the falling of interest rates, we see that these headwinds will drop significantly because commercial vehicle the smaller commercial vehicle consumers will be able to better position to replace their trucks. So I think it's, what I would say right now, it's not increasing. The headwinds are steady and we see positive signs through macroeconomic factors that it will continue through 2024 to 2025.
Operator: [Operator Instructions] As we currently have no further questions, I will hand it back to Mr. Hernandez for any closing comments.
Mark Hernandez: Okay. I'd like to say thank you for joining us today. We are confident in our strategy, which brought consistently improved results in 2023, provides an excellent foundation for the future. We are looking forward to giving you an update on our progress after Q1. In the meantime, if you need additional information, please reach out to us. And thanks again for joining us today.
Operator: Thank you. This concludes today's conference call and you may disconnect your lines at this time. We thank you for your participation.
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