The Eastern Company (EML) Earnings Call Transcript & Summary

Good morning. Welcome to the Eastern Company's 2021 Annual Meeting of Shareholders. [Operator Instructions] Please note, this meeting is being recorded. I will now turn the meeting over to your host, James Mitarotonda, Chairman of the Eastern Company. Mr. Mitarotonda, please go ahead.

Thank you. Good morning, and welcome to the 163rd Annual Meeting of the Shareholders of the Eastern Company. I'm James Mitarotonda. I am Chairman of the Board of the Eastern Company, and I will act as Chairman of today's meeting. We're glad you have joined us for this webcast and look forward to hearing from you this morning. At this time, I am calling this meeting to order. I would like to introduce Gus Vlak, the President and Chief Executive Officer of the Eastern Company. Mr. Vlak is also on the Board of Directors. The Eastern Company's Board members are in attendance remotely. They are John Everets, Mr. Charles Henry, Mr. Michael McManus, Mrs. Peggy Scott. Also in attendance by phone are Kevin Donovan, Justin Wilcox, Matthew Soroka and Yana Reiser from Fiondella, Milone & LaSaracina, the company's independent registered accounting firm. We will be filing the final reports of the voting on a Form 8-K with the SEC in accordance with the SEC rules. The appointment of inspector elections, Mr. John Sullivan, the Chief Financial Officer of the Eastern Company, is in attendance as well. I would like to introduce the Corporate Secretary, Mrs. Terry Dews. I have appointed Mrs. Dews to serve as our inspector of elections. I declared the poles are now open for each matter to be voted on today, April 28, 2021. And if you have not voted your shares by proxy or wish to change your vote, please go to the Ask a Question section, which is located on the lower left portion of the webcast screen and write your name, your address, your control ID found on a proxy material sent to you and indicate how you would like your shares voted. Again, you can now vote your shares by proxy or change your vote by going to the Ask a Question section, which is located on the lower left portion of the webcast screen. There, you can write your name, your address, your control ID found on a proxy material sent to you. You can also indicate how you would like your shares voted. [Voting]

Since everyone appears to have cast their ballots, I am declaring the polls closed. Ms. Dews, would you please provide a quorum report for this meeting?

Mr. Chairman, the total number of shares entitled to vote were 6,247,981 shares. The total number of shares represented are 5,753,793 or 92%. Accordingly, under the bylaws of the corporation, a quorum is present.

Thank you. Mrs. Dews as Secretary of this annual meeting, please read the call to meeting.

The annual meeting of shareholders of the Eastern Company is being virtually held on April 28, 2021, at 11:00 a.m. Eastern Time. In light of the public health concerns regarding coronavirus, the annual meeting is being held in a virtual meeting format only. Shareholders are not able to attend the annual meeting in person, but have the same opportunity to participate in this virtual meeting format as they would in an in-person meeting. The annual share -- meeting of shareholders of the company is being held for the following purposes: to elect 7 directors, to cast a nonbinding advisory vote to approve the compensation of the named executive officers, to ratify the Audit Committee's recommendation and the Board of Director's appointment of Fiondella, Milone & LaSaracina LLP as the independent registered public accounting firm to audit the consolidated financial statements of the company and its subsidiaries for the fiscal year 2021. Shareholders of record and beneficial holders as of the close of business on March 1, 2021, may ask questions and vote their shares during the annual meeting. If you were a shareholder of record as of the close of business on March 1, 2021, to vote your shares during the annual meeting or submit questions during the meeting, you must log into the meeting using the control number found on your proxy card, the voting instruction form or notice you previously received. Shareholders of record may vote during the annual meeting by following the instructions available on the meeting website during the meeting. If you do not have a control number, you may attend the annual meeting as a guest, but you will not have the option to vote your shares. Your vote is very important. All shareholders are cordially invited to attend the virtual annual meeting of Shareholders or any adjournment thereof, and management looks forward to having you here by order of the Board of Directors.

Thank you. We will now proceed to our stated business of the meeting. These items have been described in the proxy materials previously made available to all shareholders a record for this meeting. Does anyone have any questions or comments? If none, the first item on which we are voting today is the election of 7 directors to serve for a 1-year term, set to expire at the 2022 annual meeting of shareholders. The Board's nominees are Mr. Fredrick DiSanto; Mr. John Everets; Mr. Charles Henry; Mr. Michael McManus, Jr;, myself, James Mitarotonda; Mrs. Peggy Scott; and Mr. August Vlak.

79% or more of the votes cast by proxy were voted in favor of all nominee directors, Mr. DiSanto, Everets, Henry, McManus, Mitarotonda, Vlak and Mrs. Scott for 1-year term expiring in 2022.

I declare the nominees elected as directors for the terms specified or until such time as their successors are elected and qualified. The second proposal is to cast a nonbinding advisory vote to approve the compensation of the named executive officers. The item we are voting today is to approve the compensation of the named executive officers.

98% of the votes cast by proxy were voted in favor of the compensation of the named executive officers.

I declare the resolution to be adopted for the nonbinding vote for compensation of our named executive officers. The third item we are voting today is the ratification of the appointment of the independent registered public accounting firm, Fiondella, Milone & LaSaracina LLP.

98% of the votes cast by proxy were voted in favor of the appointment of Fiondella, Milone & LaSaracina LLP as the independent registered public accounting firm to audit the consolidated financial statements of the company for the fiscal year 2021.

I declare the resolution adopted. At this time, we would like to invite any shareholder who has any questions regarding general company matters. [Operator Instructions]

Jim, this is Gus. We have a question regarding capital allocation. I would kindly ask that we address that as part of my upcoming investor presentation.

Yes, of course.

Jim, this is Gus again. We have a comment here from one of our shareholders on the first quarter. I will touch on that as well as part of our investor presentation.

Any other questions? I'll wait a couple of minutes for any other questions from shareholders. Okay. So not seeing any further questions, all items of business have now been completed. There being no further business, I will entertain a motion to adjourn this annual meeting.

Mr. Chairman, I move that this annual meeting be adjourned.

Is there a second?

Mr. Chairman, I second the motion.

I would like to express my appreciation to all the shareholders that have attended this virtual annual meeting, as well as those who submitted their proxies but were unable to attend. Clearly, this past year has been challenging for all of us and the Eastern Company. But our company has proved again that we are fundamentally strong, resilient and know-how to act decisively. I believe we are emerging stronger from this crisis. The annual meeting of shareholders of the Eastern Company is now adjourned. I will now hand the floor to Gus Vlak, who will preside over our First Annual Investor Conference. All shareholders and guests are cordially invited to remain on the line. Go ahead, Gus.

Thank you, Jim, and thank you to everyone who has joined us this morning. I'm pleased to be here to speak with you about Eastern and share with you where we've come from and where we're going. I'm going to speak for about 50 minutes and then answer some questions. If you have joined the site of webcast, you're going to be able to follow the presentation and enter your questions on the screen. If you've dialed in by phone, I'll try to make sure that you can follow the presentation, but you're going to miss the videos that we've included later on in this presentation, and you won't be able to submit any questions. If you want to join this via webcast, the address is agm.issuerdirect.com/eml. Today, we're going to make some comments about our expectations and our plans for Eastern. Please read this notice on forward-looking statements, which was filed with our press release this morning. In addition, we're going to make reference to some non-GAAP measures. Again, please be sure to read this statement included in our press release and refer to our press release and recent filings for a complete reconciliation between GAAP and non-GAAP. Our focus at Eastern is on creating long-term shareholder value, and we believe that we've created an engine to deliver this. We start by allocating capital where we get the best returns. This includes deciding what should be in and out of our portfolio and which projects or businesses in the portfolio generate the best returns. In the past 5 years, we've allocated $126 million to acquisitions, completing 1 acquisition per year in each of the last 4 years, and we've invested $15 million in capital expenditures. We also periodically look at share repurchase as well as other investment opportunities. We believe that we have a portfolio of businesses that is not just resilient in the face of adverse conditions as the past year has demonstrated. But more importantly, these businesses are well positioned to solve the many security, safety, efficiency and increasingly sustainability-related problems that our commercial transportation and mobility customers present. The markets that our core businesses serve are entering transformational stages as a result of digitization, developments and automation and more. And our capabilities, including our engineering expertise, innovation skills and manufacturing strength, position us well with these customers. We are set up for success. When we started in 2016, we managed 12 businesses, and the largest 3 businesses represented 58% of total sales. Through consolidations, divestitures and acquisitions, we now have 6 businesses, and our 3 core businesses that account for more than 80% of total sales. The businesses also generate more cash. They're all of capital intensive, and we're continuing to improve capital efficiency. This allows us to maintain a strong balance sheet with modest depth to enhance our returns to shareholders and enables us to allocate capital to new growth opportunities in each of our 3 core businesses. Let me briefly remind you of our 3 core businesses. So this is what Eastern looks like today. Big 3 Precision includes 2 operations. It's the leader in turnkey supply chain packaging for large OEM assembly operations, and it is also one of the largest domestic providers of custom global tooling, serving consumer packaged goods and a pharmaceutical industry. We acquired Big 3 in 2019. Eberhard is a global manufacturer of access hardware, primarily serving the vehicle and vehicle accessory industry. We acquired Eberhard in 1936, and this is really a remarkable story of continuous reinvention. Finally, Velvac. Velvac designs and manufactures patient systems for commercial vehicles, and Velvac also has a strong aftermarket business, and we added them in 2017. There is customer and market overlap among these businesses, which create openings for cross-selling, yet these businesses serve a wide range of end markets. And while many are tied to vehicles, these markets are independent. I'll take a brief moment to summarize what our end markets look like. We recently touched on Class 8 and commercial vehicle OEMs. The Class 8 OEM market is traditionally cyclical and characterized by long sales cycles and program commitments. The other commercial vehicle markets are more fragmented, and total demand is more stable, although individual subsegments can be bumpy. But we also serve the commercial vehicle aftermarket, both directly and through OEM aftermarket channels as well as consumer discretionary markets, providing custom security solutions for truck accessories, like tunnel covers and truck cabs and security for sporting goods, like by frac and gun safes. And just yesterday, I received a sample of our new proprietary high-end lock just in time for Spring. And then finally, our packaging business supports OEM supply chains, primarily in passenger and commercial vehicles, but also in other assembly operations. And then the other part of our packaging business serves consumer packaged goods and pharmaceutical companies. Demand in this last segment has been booming during the past year. In aggregate, we're well diversified across a broad range of end markets. We're going to go into more depth in each of our businesses and markets in a few minutes. But first, let me show you the results of our value creation engine. Our value creation plan is rooted in our focus on growth, and we believe we're on track to double sales growing at an average rate of 11% and between 2016 and 2020. Needless to say, our 2020 sales were impacted by the decision of a number of our customers to close operations in the second quarter in response to the COVID-19 pandemic. And as you'll recall, we experienced a significant decline in sales and orders in the second quarter last year, with a meaningful improvement in each subsequent quarter. Before 2020, we were growing sales at an average annual rate of 15% between 2016 and 2019. Top line growth since 2015 is the result of both organic growth in our core businesses as well as acquisitions. Over the past few years, most of our organic growth has come from Eberhard's expansion with core customers, end markets and Velvac's new truck fleet program. Sales growth is one of the primary drivers behind our expansion of cash. When we started, Eastern reliably generated roughly $9 million of cash from operations, and we've now comfortably doubled that number. The growth in cash flow generation between 2015 and 2019 came primarily from sales and net income growth, but also from improvements in capital efficiency, we've been reducing our working capital and improving returns on our capital expenditure by strengthening our discipline in capital allocation and shifting our portfolio to more capital-efficient businesses. Cash powers our growth engine, allowing us to pay down debt and invest in future growth. And even through the pandemic, we continue to generate strong cash. 2020 was a true test of our resilience and our ability to continue to generate cash. As I mentioned, the second quarter in 2020 was especially challenging, but performance has improved each subsequent quarter. And now our businesses are well positioned to deliver in 2021, and we believe we're off to a strong start. Let me show you what I mean. This morning, we released the results for our first quarter in 2021. The sales in the first quarter of 2021 increased to $73.1 million. That's a record in Eastern's more than 160-year history, and an increase of 12% compared to the first quarter of 2020. The increase in sales was primarily due to growth across a broad range of commercial vehicle markets, including Class A trucks, service body, light trucks, recreational vehicle, and very strong demand from electric vehicle manufacturers. Additional sales from the acquisition of Hallink completed in the second quarter of 2020, partly offset the loss of sales from the divestiture from the Canadian Vehicle Corporation in Sesamee Mexicana in the second and fourth quarter of last year, respectively. As a result of strong demand across many of our markets, our backlog at the end of the first quarter in 2021 remained solid at $98 million. That's an increase of $24 million or 33% over the backlog at the end of the first quarter in 2020. In the first quarter, we responded well to significant disruptions in our supply chains and increases in raw materials. All our businesses were impacted by interruptions in transportation, which caused significant delays in shipments. Moreover, freight costs and prices of certain raw materials like steel and presence, rose throughout the quarter and are continuing to increase. Fortunately, many of our businesses have been able to pass on much of these increases. As a result, earnings were $0.93 per diluted share, that's double the prior year, but the first quarter of 2021 includes onetime gain from the sale of real estate associated with the consolidation of our Eberhard and Illinois Lock businesses. And adjusted for that onetime gain, our earnings were $0.71 per diluted share, which reflects a 54% increase over the first quarter in 2020. In addition, our adjusted EBITDA margin in the first quarter of 2021 was up to 12% compared to 10% in the first quarter of 2020. Please refer to our statement on non-GAAP measures and the schedules attached to the press release for a reconciliation between GAAP and non-GAAP. We believe that this first quarter of 2021 is beginning to show the earnings potential of our Engineered Solutions businesses, including Big 3 Precision, Eberhard and Velvac. At this time, I would like to talk more about each of our core businesses and share with you some of the innovative products that we're working on. Big 3 Precision, as you recall, includes 2 operations, returnable packaging for OEM supply chains and blow mold tooling for the CPG and pharmaceutical packaging. Big 3 Precision products, the returnable packaging part of Big 3, is one of the largest and one of the few end-to-end players in this market for custom returnable packaging. Big 3 Precision solves OEMs needs for safe, protected and efficient supply chains. We estimate that the North American market for custom packaging for OEM supply chain is in excess of $1 billion and still very fragmented. And this market is beginning to enter a transformational stage. Automotive supply chain packaging, which is far and away the largest segment, is expected to grow rapidly as a result of the projected increase in the number of new vehicle launches, including the launch of numerous electric vehicles. The number of launches is projected to increase by an average of 70% in the next 4 years to approximately 70 new models per year compared to 40 models per year in the prior 10 years. This is driven by consumer demand, new product technology, new methods of production as well as intense competition, and each new launch requires new packaging, design and production. At the same time, manufacturing automation is driving packaging for design and packaging that integrates with the assembly line, as is illustrated on the picture on the left of this slide. You see here our seat pallets moving alongside the production line, delivering seats to robots for placement into the vehicles. As OEMs continue to apply automation, they look for returnable packaging to provide a precision fit and precision indication so that components, like seats, can be picked up and retrieved by robotic devices. And increasingly, packaging needs to be able to communicate with the robot equipped work cells so that to sell knows which product is being introduced. We see the increase in manufacturing automation as a development that enables us to add more value to our supply chain packaging customers. And as the leader in North America, we're well positioned to capitalize on this development. In addition to strong favorable market dynamics, we believe there are significant expansion opportunities in the near-term, like providing more products, especially in dunnage, expanding geographically and pursuing additional end markets to further diversify between beyond vehicles. The other part of Big 3 Precision is our mold services. Our global tooling business is one of the largest in North America, with one of the broadest product offerings, providing our customers with a range of tooling solutions, including IBM, ISBM, 2 steps and caps and closures. We have long-standing relationships with some of the most demanding consumer goods and pharmaceutical customers who offers a steady stream of recurring projects. In 2019, Big 3 Precision acquired associated toolmakers in the U.K. to expand our offering from bottles to caps and closures. And last July, we acquired Hallink, based in Ontario, Canada, and integrated it with this business. Hallink expanded our offering to include 2 step global tooling and provides an entry into innovative packaging design using recycled plastics. We work very closely with leading-edge consumer brands like ICER or water in Canada, which uses 100% cycled plastics for its water bottles. And we see the move to recycled plastic as a huge opportunity for this business because our customers are looking to us to solve the complex engineering and design challenges associated with recyclable plastic packaging. Next, our Eberhrad business. Eberhrad is a leader in the approximately $350 million to $400 million market for access hardware for vehicles and vehicle accessories, providing safety and security hardware primarily to commercial and military vehicle OEMs and body builders, but also with a broader reach into a wide range of industrial and consumer products. Eberhrad is in the process of combining with our Illinois Lock business, which Eastern bought in 1965. And through this combination, Eberhrad not only benefits from consolidation synergies, it is currently in the process of streamlining its manufacturing footprint, but more importantly, it is able to drive the adoption of many of the electromechanical and digital products into our biggest markets. In the past years, our Illinois Lock business has invested in these capabilities, including through the acquisition of Load N Lock. And last year, through the combination, we were able to launch many of those products, which we call blue origin into the truck accessories market. With the combination, we're now able to bring these innovative products to many of our best body building and service body customers. And I would like to share with you a brief video, illustrating the application of electromechanical closing systems and digital controls for truck boxes. [Presentation]

You can see here the controls. If you would like to see that video again, it is available. It's available on YouTube and on our website at eberhard.com. Our third core business is Velvac. Velvac is focused on driver safety and IT offers vision systems, primarily mirrors, to truck OEMs, fleets and other commercial vehicles and motorhomes. Velvac is as a dominant player in most of its market, and no small part due to its excellence in manufacturing and our favorable cost structure in Mexico. And the business is able to leverage its position in these markets to drive innovation by integrating cameras and other vision technology into its products. Velvac has grown significantly since we acquired the business in 2017. It successfully launched a number of new -- large new OEM mirror programs. And just last year, we moved into a larger manufacturing site in Mexico to support the launch of 2 new programs this year. Last year, we also introduced our vision-based blind spot detection system to the RV market. This is a proprietary product that we developed in-house leveraging an existing platform hardware. And let me share with you a short video of blind spot detection solution. [Presentation]

Our blind spot detection system is based on high accuracy computer vision technology. And it detects objects up to 100 feet behind the vehicle and integrates with our mirrors for optimal viewing angles. When a system detects -- when our system detects a motor vehicle in a blank spot on 1 or both sides, the icon into respective miracast will illuminate to warranted user. What's important to OEM customers is that the system is easy to install and it enables self updating and auto calibration, which means that it can support a wide variety of vehicle sizes and shapes, which is important in the ERV industry. We are the only provider to the RV OEMs of this blind spot detection system, which improves driver safety and offers us a new source of growth for the business. Together, Big 3 Precision, Eberhard and Velvac represent the new Eastern. In summary, we've had a busy couple of years. We started with a plan, and we've continued to execute. We've completed 4 acquisitions in the past 4 years, sold a number of businesses, and we built a strong leadership team. More importantly, we believe that 2021 in many ways a new start for Easter, with a recovery from the COVID-19 pandemic, a focus on our largest businesses and a strong balance sheet. As a result, we're excited about the future. We have a portfolio of businesses that allows us to continue to build scale, explored organic growth, launch innovative new products and offers attractive opportunities for bolt-on M&A. To do this, we remain focused on generating cash and paying down our debt. We believe that these actions together will contribute to our goal of becoming a $100 million EBITDA company. After 5 years at Eastern, my conviction in our ability to create long-term shareholder value has only strengthened because we have delivered step change growth. Our portfolio of businesses offers tremendous opportunities and we have an exceptional team of leaders. I appreciate your confidence in the company. At this time, I'd like to see if we have any questions and begin to address those.

We have a question about capital allocation, and I'd like to maybe just spend a minute to dig into that a little bit more deeply. Let me just read out the question here. The question is about how we set priorities for capital spending, acquisitions and debt reduction? And where share repurchase fits in? And whether we use hurdle rates? So our first priority is to make sure that our businesses have the capital the capital they need, and so maintenance capital is an important part of our capital -- our base capital allocation we do look at the efficiency of that capital allocation very thoroughly, asking each of our businesses to look for opportunities to reduce maintenance capital spend where they exist basically through finding opportunities to more efficiently solve whatever the maintenance problems are that they're seeking to address. And we have a process in place to do that. Beyond that, we use an internal process for growth capital allocation. And we set a hurdle rate for any growth capital allocation that is a risk-adjusted rate or a risk incorporated rate of 30%. Now we recognize that many of our opportunities run into execution challenges. So we believe that at 30%, we can be very confident that we'll be able to deliver the appropriate kind of return on growth capital. We have a program in place to reduce our debt reduction, and we're committed to doing that at an accelerated rate beyond the bank requirements, and we have a program in place to do share repurchases. As you recall, the purchase of our share repurchase program is primarily to offset any dilution from share issuance as a result of our incentive plans, but we have structured the program in a way that we're able to take advantage of low points in our share price so that we can buy our equity efficiently as we go to market. We think that at this point, our focus on M&A is -- we know that at this point, our focus on M&A is primarily on doing smaller tuck-in acquisitions. We see a pretty healthy pipeline of those. We think those are -- we look at those that construct in our existing businesses. And because we believe that both we get better returns for those and in many cases, we're able to command better pricing in the tuck-in acquisition market, then we would be, if we were to buy out, go and buy a whole new business. I'll move on, if there's any other questions here. There's a question here about where we will trade with regards to what would happen if Eastern's market capitalization falls below the Russell -- the cut off point for the Russell 2000 Index? And if we're no longer eligible to be in the index, what we would do in terms of share repurchases as Index fund becomes for sellers? It's really hard to say what the threshold will be. We do believe that our share price, certainly, the share price today will help us get above the cutoff for the Russell 2000 index. With that, I'm looking to see if there are any further questions. There are some operational questions, which I'll have -- 3 that I'll take each in time. First, will pricing actions cover raw material inflation? Or should we expect margin compression in the next few quarters? We do believe that the raw material prices and the demand access to raw material will continue to toughen in the second quarter. There's very little visibility into whether that's going to sustained into the third quarter. This could lead to some margin compression. We have 2 things working in our favor. We're able to command some price increases for many of our customers, and we have a number of new product launches that will also help us offset what are traditionally lower margin on some of the legacy products. There's a question about employee turnover and labor availability, wage pressure. We do find that in certain markets, access to labor is challenging. As a result, we're working with our customers on shipment dates and delivery dates of some of our products to make sure that we can continue to meet their demand. And of course, we are solving through a range of actions to expand our access to labor to mitigate that issue. But I would say it's less turnover and more our ability to grow our labor force in the face of growing demand. And then there's a question here. Is there any part of this business that will soften this year as COVID dissipates. the only part of our business that I would say has benefited from COVID has been our global tooling business, where demand for hygiene-related packaging and therefore, additional tools, was very strong in the middle of last year. I believe that we have a number of large programs in place that are unrelated to COVID in the tooling business. That should be able to offset any loss of hygiene-related -- hygiene packaging-related demand in that part of our business. So we're not really anticipating softening as a result of dissipation of COVID. In fact, we're seeing quite the opposite voice of our markets are strengthening as COVID disappears. So I believe -- oh, there's a question here about the magnitude of processing opportunities that exist. And given the long sales cycles, when do you expect indications of success or failures? So each of our businesses, the businesses that sell into the same customers, coordinate, I would say, on the front end of their sales cycle to exploit new opportunities. And this is really through the introductions to customers and making sure that they identify and leverage the relationships that we have. Those opportunities are already occurring. As you know, we bought Velvac in 2017. So obviously, they've had quite some time to work themselves into the system. But even at Big 3 Precision, there have been a number of opportunities that were introduced through our existing relationships, primarily in the heavy-duty truck industry, that they've been able to take advantage of and drive sales. I'll add to that, particularly at a time like today when we are in close contact with our customers on issues of availability, pricing as a result of raw materials, the ability of our business is to collaborate, coordinate, jointly problem solve these issues, is helping us address these, I would say, in a faster and more effective way than we might -- if each of them, we're trying to solve these problems on their own. With that, there are no further questions. I would like to thank everybody for joining us this morning and look forward to being in touch as we report out on the first quarter during our earnings call coming up as well as subsequent meetings with investors. Thank you all for joining.

Thank you. Ladies and gentlemen, this does conclude today's event. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.