Good day, ladies and gentlemen. And welcome to The Eastern Company’s Second Quarter 2019 Earnings Call. All lines have been placed on listen-only mode and there will be a question-and-answer session after the presentation.

[Operator Instructions] At this time, it's my pleasure to turn the floor over to Chris Moulton, Head of Corporate Development and Investor Relations, for The Eastern Company. Sir, the floor is yours..

Thank you. Good morning, and thank everyone for joining us. Speaking today will be Eastern’s President and CEO, Gus Vlak; and our CFO, John Sullivan. After that, we'll open the call for questions.

Please note that some of the information you will hear during our discussion today 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 expense, 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.

For more information regarding these risks and uncertainties, please refer to risk factors discussed in our Form 10-Q, filed last night and our most recent 10-K. With that, I'd like to turn the call over to Gus for opening remarks..

Thank you, Chris, and good morning to those joining us on the phone and via the web. This morning, we will review our sales and earnings for the second quarter of 2019 and touch our progress towards our three-part strategy. I'll start with the quarter.

Net sales for the second quarter were $61.4 million that’s compared to $60.9 million for the same period in 2019. Sales growth in the second quarter was primarily the result of the addition of several new truck mirror programs as well as our success in capitalizing on the continued growth in Class 8 and medium-duty truck sales. U.S.

Class 8 retail sales rose 22.5% to 135,000 vehicles in the first six months of 2019, that's compared to 110,000 a year earlier according WardsAuto and sales of medium duty Class 4 to 7 vehicles remained similarly strong. Strong sales to truck markets were partly offset by lower sales to recreational vehicle OEMs, consistent with our own expectations.

According to the RVIA, wholesale shipments of motorhomes were down 23% to 25,000 in the first six months of 2019 that compares to 33,000 for the same period in 2018. Net income for the second quarter in 2019 was $2.5 million or $0.40 per diluted share, compared to $3.3 million or $0.52 per diluted share for the same period in 2018.

The decline in the second quarter net income compared to the second quarter of 2018, reflects our $1.8 million onetime nonrecurring restructuring costs associated with the discontinuation of Road-iQ, a subsidiary Velvac, and the previously communicated consolidation of our Composite Panels Technologies facilities.

In keeping with our strategic priority to improve execution, we've adopted a leaner approach to developing enhanced vision products at Velvac and consequently decided to discontinue our investments in our Road-iQ operations.

Although this one-time charge negatively impacted our reported net earnings for the second quarter, we believe this is a prudent move that will strengthen our business results going forward. We have also continued to make progress on our three-part strategy, optimizing our portfolio of businesses, improving execution and building our balance sheet.

Most notably, our efforts to manage our working capital and inventories in particular to more appropriate levels has helped us to generate record-breaking operating cash flow in the second quarter of ‘19. We use cash primarily to reduce our debt and help position Eastern for future growth.

John will now provide additional detail on the quarter and walk us through the results..

Thank you, Gus. On a consolidated basis, net sales in the second quarter of 2019 increased 1% to $61.5 million, as compared to $60.9 million in the second quarter of 2018.

The increase in net sales for the quarter was driven by continued strength in the Industrial Hardware, Metal Products segment offset by a decline in net sales in the Security Products segment. Total sales volume in the second quarter of 2019 decreased by 5% while new products contributed 5% as compared to the second quarter of 2018.

New Products included a hood mount truck mirror, molded toolbox latching system for pickup trucks, and various industrial castings for the agricultural market. On a segment level basis. Net sales in the Industrial Hardware segment increased 5% in the second quarter of 2019 as compared to the corresponding of 2018.

Net sales increased in the Class 8 truck, distribution and specialty vehicles markets. New products contributed 7% in the second quarter as compared to the second quarter of 2018. New products included a Class 8 tuck hood mount mirror, mini rotary with adapter, a vent assembly for Class 8 trucks, and molded toolbox latching systems for pickup trucks.

Net sales in the Security Products segment decreased by 8% in the second quarter as compared to the second quarter of 2018.

This decrease in net sales reflects lower demand for the Company’s commercial laundry products and the termination of a supply contract with a customer to manufacture mechatronic padlock systems for cellphone tower security access applications.

Net sales in the Metal Products segment increased 5% in the second quarter as compared to second quarter of 2018. Sales volume decreased by 7% while new product sales and price increases contributed 11% during the second quarter of 2019 as compared to the second quarter of 2018.

New product sales included various industrial castings serving the agriculture market. On a consolidated basis, gross margin as a percent of sales in the second quarter of 2019 was down slightly to 24%, as compared to 25% in the second quarter of 2018.

Cost of products sold in the second quarter of 2019 increased by $0.6 million or 1% as compared second quarter of 2018.

The increase in cost of products sold reflects the mix of products, increased costs due to additional sales volume, and costs incurred for the launch of the Class 8 truck mirror program, as not all required components have been approved by alternate suppliers who offer more favorable pricing, and partially offset by a decrease in raw material prices.

We experienced $0.3 million in tariff-related costs on China-sourced products in the second quarter of 2019, which we did not incur in the second quarter of 2018. Raw material prices have begun to decline by 20% for hot rolled steel and 13% for cold-rolled steel in the second quarter as compared to the second quarter of 2018.

Product development expenses increased $0.6 million or 38% in the second quarter of 2019 as compared to the second quarter of 2018. The majority of the increase relates to the ongoing development of the new truck mirror program awarded in 2018.

SG&A expenses decreased $1 million or 11% in the second quarter of 2019 as compared to second quarter of 2018, primarily related to payroll and payroll-related expenses.

As previously mentioned, during the first quarter of 2019, we consolidated the Composite Panel Group by relocating the Composite Panels Technologies division based in Salisbury, North Carolina to the Canadian Commercial Vehicle division located in Kelowna, British Columbia. Non-recurring costs incurred in the second quarter of 2019 were $0.2 million.

These costs included the sale of inventory, fixed assets, moving expenses, severance and lease termination costs, which we finally close the operation up in April of this year. During the second quarter of 2019, we discontinued the Velvac Road-iQ operations in Bellingham, Washington.

Nonrecurring costs related to the discontinuation in the second quarter of 2019 were $3.7 million, which included the write-off of fixed assets, inventory, intangible assets, severances, lease termination costs, and other non-recurring operating expenses.

These costs were partially offset by the reversal of a $2.1 million contingent liability the we established with the acquisition of Velvac in April of 2017, which is no longer applicable as of June 29, 2019, resulting in a net charge to earnings of $1.6 million.

Net Income for the second quarter of 2019 decreased to $2.5 million, or $0.40 per diluted share, from $3.3 million, or $0.52 per diluted share, for the second quarter of 2018. In the second quarter of 2019, we incurred significant one-time costs of $1.4 million net of tax associated with the restructuring.

We generated approximately $8.7 million in operating cash flow during the first six months of 2019 compared to approximately $5.6 million during the same period in 2018. We allocated $6.3 million in cash for long-term debt reduction, of which $5.5 million was on an accelerated basis.

We also repatriated $0.7 million from our Canadian operations and $0.5 million from our Mexican operations in the first half of 2019. We expect to repatriate an additional $2.5 million from our Chinese operations in the third quarter of 2019.

Cash flows from operations coupled with cash at the beginning of the year have been sufficient to fund our CapEx, debt service, and dividend payments over the period. Additions to property, plant and equipment were approximately $1.3 million for the first six months of 2019.

Following the end of the quarter, we paid additional an $2.5 million on our long-term debt. At this time, I'd like to turn it back to Gus for a few closing comments..

Thank you, John. Looking ahead, we believe our businesses are positioned well to perform in the second half of this year. We don't see any further restructuring charges and our customer backlog is expected to remain strong for the remainder of 2019.

We believe that solid demand for our products in Class 8 and the medium-duty trucks, truck accessories and other core markets will continue and we have significant number of exciting new product launches planned in the second half of this year. At the same time, we continue to seek opportunities for expansion through acquisitions.

As you know, we look for businesses with strong, intrinsic economics with cash flow, margins and return on capital, businesses that have a robust business model in attractive niche markets that we understand and have committed and capable management team.

As mentioned earlier, we believe that our balance sheet positions us well to pursue further acquisitions. We remain confident that our three-part strategy of optimizing our portfolio of businesses, improving execution and building our balance sheet will generate long-term results for our shareholders.

With that, I'll turn the call back to Chris for questions..

Operator, do we have any questions that are coming over the telephone?.

There are no questions in queue at this time. [Operator Instructions] We don't have questions in the queue at this time..

We do have some questions on the webcast. So, first one, absorbing almost $0.10 a share on tariffs pass-through is a lot.

Are you trying to mitigate? Why can't you pass charges to your partners? Will the third quarter also have this negative impact on earnings?.

I'll answer that. Basically, we are passing tariff cost increases along on to our customers. We’ve been doing that since the very beginning when this was first started. We do have to report cost increases by each segments in the 10-Q. So, we like to identify those one-time new costs that we didn't have in prior year.

Costs have been pretty much passed along to, and we are not really seeing any negative impact in total, as a result of tariffs. However, there is out there an additional potential for another 10% tariff effective September 1st, that could have an impact on the third quarter. We may have more difficulty passing along those increases.

It does go across our much broader spectrum of products. But that’s yet to be seen, because it hasn’t been enacted yet..

Okay. We have another question.

What is the expense for M&A, wouldn't that be done by inside officers already on the payroll? Are you using outside people to look for mergers? When can we expect an accretive purchase?.

So, we do use third parties in our M&A work. But, the success in completing any M&A transaction is difficult to predict, certainly difficult to predict accurately. But, as I mentioned before, I believe we are well-positioned to complete the transaction..

We have another question.

If you are done with write-offs, can we expect $0.60 in earnings, like the third quarter last year?.

So, as you could compute, without the one-time charge, we’d have earnings in excess of our second quarter 2018 this year. And I believe our businesses continue to remain strong. Our backlog is very robust, which puts us in a good position for the third quarter..

One more question. Long-term question. Driverless cars’ effect on truck window sales. Do you see long-term impact? I'm assuming mirror, truck mirror sales..

So, in the long term, a driverless car will not be the conventional mirror in the way that we currently supply them to, mostly commercial vehicle segment -- or entirely the commercial vehicle segment. They will however need other tools to capture data vision from around the vehicle.

And we are already in the business of positioning such tools and supplying such tools in the form of cameras to some of our customers..

Let me just refresh our webcast questions.

With industry orders for new Class 8 truck orders declining severely year-to-date, how do you maintain such a positive outlook related to the part of your business that is exposed to this end market? Is this due to your backlog? And if so, what are your recent order trends related to this market look like?.

So, it is true that miles on the road, freight tonnage on the road and orders have come down significantly in the Class 8 truck markets. The production remains pretty robust and is expected to remain robust, I would say into the early part of next year. So, we believe that that backlog will -- that we’ll continue to supply that backlog of production.

Going into next year, we believe that we will not experience such growth in Class 8 and that we are shifting our attention and are leaning more heavily on some of the other markets for further growth. So, the new product launches that I mentioned earlier are an important part of our growth into 2020..

On more refresh. It appears that we have no further questions. So, with that I'll turn the call back to the operator..

Thank you, sir. And ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation. You may disconnect at this time..