Chris Moulton - Head, Corporate Development & IR Gus Vlak - President & CEO John Sullivan - CFO.

Analysts:.

Good morning, ladies and gentlemen and welcome to the First Quarter 2018 Earnings Call. My name is Simmy [ph] and I'm the event manager. [Operator Instructions] I would like to advise all parties, this conference is being recorded. And now I would like to hand over to your host, Chris Moulton, Head of Corporate Development and Investor Relations.

Please proceed..

Thank you. Good morning all, apologies for the delay. Thanks for joining us today. Speaking first today will Eastern's President and CEO, Gus Vlak; and then CFO, John Sullivan. And after that, we'll open the call for Q&A.

Please note, that some of the information you will hear today will consist of forward-looking statements about the Company's future financial performance and business prospects, including statements regarding revenue, gross margin, operating expenses, other income expense, taxes, and our 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.

For more information regarding these risks and uncertainties, please refer to the risk factors discussed in our Form 10-Q filed Friday and our most recent 10-K filed with the SEC. Eastern assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

I'd now like to turn the call over to Gus for opening remarks..

Thank you, Chris, and thank you for joining us to discuss Eastern's first quarter fiscal 2018 results. We hold these calls each quarter to give our shareholders another way to learn more about Eastern. I'm pleased to report that we delivered broad-based topline growth across all three of our business segments during the first quarter of 2018.

Sales for the first quarter were $59.4 million, that's compared to $36 million for the same period in 2017; that's a 65% year-over-year increase in sales. This sales increase reflects the acquisition of Velvac which closed on April 3, 2017, and importantly, sustained organic growth across all three of our business segments.

Demand across many of our end markets is strong and our businesses are executing well. Some of our industrial hardware businesses including Eberhard, Velvac and composite panels are well positioned to take advantage of strong demand for commercial vehicles.

According to ACT Research, a publisher of commercial vehicle industry data; nation-wide truck orders in the first quarter of 2018 hit the second highest level in history, it marks the best period for order since 2006.

In our security product segment, our Illinois Lock's business continues to boost sales from new products including a zinc-branded puck lock, a spring return lock, a push button lock, and a mini-cam lock. And at the same time Greenwald Industries has scored several significant competitive wins driving up it's sales.

Finally, our metal products business is capitalizing on the resurgence in demand from our mining customers and at the same time, realizing the benefits from our diversification into industry end-markets including oil, water, gas and rail industries.

Operating profit for the first quarter was approximately $4.2 million, as compared to $2.2 million for the same period in 2017. Net income increased 104% to approximately $3.1 million or $0.49 a share for the first quarter of '18 compared to $1.5 million or $0.24 a share for the same in 2017.

Growth in net income was primarily due to increased sales and the reduction in corporate income taxes. I'll return later on this call for some closing remarks, but first I'd like to hand it over to John Sullivan to share our financial results in further detail..

Thank you, Gus. I'll now share the first quarter results. As Gus noted, net sales in the first quarter of 2018 increased to $59.4 million or by 65% as compared to the first quarter of 2017. Organic sales growth was 15% as compared to the first quarter of 2017.

Sales volume of the existing products increased by 58% in 2018 as compared to the first quarter of 2017. First quarter was also favorably impacted by the introduction of new products that increased sales by 6%.

Until segment level performs, net sales in the Industrial Hardware segment increased to approximately $36.6 million or 137% as compared to the first quarter of 2017. The inclusion of Velvac's first quarter 2018 sales would currently report approximately 88% of the segment sales growth.

The Industry Hardware segment achieved strong organic growth by 19% as compared to the same period in prior year. Net sales in the Security Products segment increased to $15.1 million or an increase of 8.6% as compared to the first quarter of 2017.

Net sales in the Metal Product segment increased to approximately $7.8 million or an increase of 60.2% as compared to the same quarter of 2017.

Consolidated gross margin as a percentage of sales for the first quarter of 2018 was 24.8%, compared to 24.1% in the first quarter of 2017; a favorable impact from cost absorption due to higher sales was partially offset by higher material costs, mainly due to increases in steel prices.

Engineering expenses increased $0.8 million or 120% to approximately $1.4 million in the first quarter of 2018 as compared to approximately $0.6 million in the same period of 2017. The increase is primarily as a result of the Velvac acquisition in the second quarter of 2017.

Selling and administrative expenses increased $3.2 million or 55% to $9.2 million in the first quarter of 2018 as compared to $5.9 million in the same period of 2017. The most significant factor contributing to the increase in cost was the Velvac acquisition which increased payroll and payroll related expenses in the first quarter of 2018.

Operating profits increased by $2 million to $4.2 million or 7.4% of sales in the first quarter of 2018 and approximately $2.2 million or 6.2% of sales in the first quarter of 2017. We generated $96,000 in cash from operations during the first quarter of 2018 as compared to $2.4 million in the first quarter of 2017.

The decrease in cash flow was primarily the result of significant increase in sales which led to a temporary increase in the level of working capital due to timing differences in the collection of accounts receivable, payment of liabilities and changes in inventory.

We expect working capital to decline in the second quarter which shouldn't lead the higher cash flow generation. We currently have approximately $16.3 million in cash and cash equivalents and about $30.8 million in total debt. I'll be turning the call back to Gus for closing remarks..

Thank you, John. All right, in conclusion, we continue to make progress at our three-part strategy of optimizing our portfolio, improving execution and building our balance sheet.

Our integration efforts related to Velvac continue to proceed very well and we are building a pipeline of potential acquisitions which we're actively pursuing including some new prospects and have strong economics and will help us build scale in many of our current and prospective new end markets.

We also invest in the development of new products across all our business including Road-iQ which is a division of Velvac, and a product called gPay at Greenwald Industries.

For those of you who are unfamiliar, Road-iQ is a connected vehicle vision technology that provides both active and passive safety to drivers of RVs, trucks, and other specialty vehicles. And gPay is a new payment system that enables consumers to use their mobile phone to pay for their laundry connecting via Bluetooth.

Both products are currently being tested by potential customers and Road-iQ has secured some initial orders for it's [indiscernible] protection application.

We're beginning to see some impact of the uncertainty surrounding tariffs and trade regulation on our customers, as well as our business; at this point we believe the impact will be manageable and are confident that our businesses are well positioned to benefit from the continued strength in underlying demand growth.

With that, I'd like to turn over the call to the operator for Q&A.

Operator, are there any questions?.

[Operator Instructions] We have a question from Sudha [ph]. Please proceed, your line is open..

I have a quick question, regarding your Velvac integration. I know you've been spending some capital trying to get that integration off the features into your platform and product lineup.

So wondering where you are in terms of spend, are you still -- in terms of how much capital you're using now to integrate that and what your plans are going forward? And most of them handed away [ph]?.

For the products that we're developing now for Road-iQ in particular, which we launched -- some of which we launched at the end of last year and some of which we launched in August.

We believe that we are well through the capital spend for that and we expect to see a deceleration of that really starting at the -- look, actually we're already starting to some deceleration in this quarter and that will continue through the rest of the year..

So mauling [ph] at your financial for the rest of the year, at least for now we could at some point start scaling back some of that expense and try to get a better idea of what you guys can do? I guess, right..

Correct..

[Operator Instructions] We have no additional questions at the moment..

Operator, it does look like we do have some questions that have come in over the webcast. So let's get to those.

Question one, curious if you can share a little bit more with us with what you're experiencing with respect to raw material price escalation? You mentioned steel prices are to a degree impacting your business; how quickly are you able to implement price increases on your products? How exposed is your business to the proposed tariffs?.

I want to distinguish between steel prices and steel tariffs and the other tariffs. Steep tariffs affect us in three ways; first, domestic steel prices have gone up since the beginning of the year by something in the 10% to 15% range as domestic suppliers for steel have raised their prices.

And this obviously affects our raw material prices which we would ordinarily seek the pass-through to our customers who has often some lag but we work to pass much of that through.

Second, there is some uncertainty relating to the steel tariffs and it's affecting the reliability of supply, not that we're unable to secure any of the raw materials that we need but we note that some of the traders are periodically holding back since supply and anticipation of price increases.

And third, some of our customers, primarily I would say those who supply retail or consumer products are expressing some concern about their ability to pass on higher prices and therefore the potential impact on demand. At this point however, many of our markets were primarily exposed to industrial markets remained very strong.

The other tariffs which are under discussion so far appear to have very little impact on us, our components really are not the target of those tariffs..

We have another question.

Most of your cash is currently overseas; will you repatriate any of those cash?.

Yes. We are currently in the process of doing that. We have identified the foreign operations, we've identified the amount of cash that we do wish to repatriate. We're in the process of preparing the documents in order to affect a cash dividend from our overseas company within the second quarter..

And we have another question; this actually relates to cash flow. Your operating cash flow came in quite a bit lower than projected than I projected.

Can you provide me a little more detail as to what drove this?.

I think we mentioned earlier, we did generate the $96,000 in cash in the first quarter compared to about $2.4 million in the first quarter of last year.

This decrease in the cash flow was primarily the result of an increased stable [ph] that we experienced in the first quarter and the resulting build-up in some inventories in order to the future sales and some timing differences in the collection of accounts receivable and the payments of our larger billings..

I think we have a final question; can you provide an update on your M&A pipeline? Any details from the size and types of businesses that you're seeking? Also, how do you intend to finance deals? What are your plans to mitigate risks with respect to the ways in which you plan to finance these transactions?.

Lot of questions. So we continue to actively review deals and are making progress in building our M&A pipeline. As you know, the timing of any acquisition is very difficult to predict.

And we are pleased looking to grow Eastern by deploying capital into value creating opportunities and our efforts continue to focus on both, accretive bolt-on acquisitions that complement and build scale in our existing business, as well as potential new businesses that already have scale and a clear path for our growth, either organically or through additional M&A.

We're looking for businesses that have strong recurring revenue component to them, businesses that make critical components and ideally have an installed base and some aftermarket element to them..

It appears that we have no further questions. As always, we appreciate your time and interest in Eastern Company. Have a great day. With that, I'll turn it back to the operator. Thank you..

There are no audio questions as a reminder [ph]..