Have that we have for you is Core Molding Technologies, ticker CMT, based out of Ohio. With us from the company today, we've got Alex Panda, the Chief Financial Officer, Eric Palomaki, the Chief Operating Officer, and Dave Duvall, CEO. I'll turn it over to Dave to get us started this morning or afternoon. Thanks, Dave.
All right. Thanks, Steven. Afternoon, everyone. What I'll do is I'll start off and kind of give a little background, a little story, an elevator pitch for Core Molding, what we do and how we got to where we are. Probably give a little context to who we are and where we are today. When we started, if you look back at Core Molding, you look back where public—I was a public security company. You look back to where we were in 2018 and 2019. We were in bank default, trying to stay out of bankruptcy. Had a lot of problems on the operational side, people leaving the organization. We came in—the CEO was let go—and we came in to help do a turnaround, help the team with the turnaround.
Back in that time frame, it was real focused on what are we going to do to get out of bank default, start servicing customers. We started putting the processes and systems in place to grow the company. The very first part of any turnaround, I used to work with Carlyle Group, do a lot of turnarounds. Every time, it's always about the people, right? The board or everybody would say, "Oh, it's fine. We were—I heard the comment. We were penny wise and pound forward." I mean, we didn't invest in the equipment. That's really not the reason because if you don't have people to take care of the equipment, then that's what really happened. We put a lot of systems in place, and we worked with what was called must-win battles.
Our first must-win battle was really getting the right people on the bus, getting the right people in the operations. Eric changed out just about every plant manager. We put in HR that we worked with in the past to really put in the organizational development system and making people feel a part of something bigger than what they are. From there, we really started working on the operational side, fixing the equipment, getting the operations, getting efficiencies in place, and really getting delivery quality and the customer support systems in place. That took us a year there. That allowed us to get into the next must-win battle, which was really the customer contracts. On a lot of the large truck customers, the quoting that was done on these large contracts that were long-term contracts, the pricing was favorable to them, not ours.
We were losing money on a lot of the truck contracts. What you see about three years ago, we started doing what we call the portfolio improvement. That was really the price increases. It takes a while to do that with some of the contracts. You have to wait for the contract to end or tell them at the end of their contract, "We're no longer going to do this business." Nobody likes to hear that. Everyone's mad and hates you at the time, but in the end, they realize it. What we'll see today is that some of those truck customers that we did not get to do business—in fact, we did a price increase—are coming back to us now to be able to redo that business.
Where we are today, we have a very stable, well-executed business, which is what we focused on the first four years. You know, everybody says, "What's your strategy?" The strategy was at the very beginning to be able to execute well. Because if you can't execute well, there's no strategy that will help you at all. Where we are today, we're stable. We have cash in the bank. Our focus today, must-win battle, is invest for growth. That's investing in our sales comp, our sales organization, business development, account management, as well as, where we see opportunities for inorganic growth to grow our sales channels. Diversify the business and grow. That's our focus today. Everything we did before now was to put ourselves in this position to be able to grow a bank or a company.
Growing a company that isn't able to execute will only create cost. Publicly Traded was founded in 1980. Core was actually a reverse merger with Navistar as it was carved out of Navistar. That's why the background in the truck industry. It was all truck to begin with. You know, we look at nine years ago, Core was 92% truck. Today, we're 50% truck. The key is to diversify the business. Look at investment highlights. We have a market leadership position. We have about 86% market share in the personal watercraft industry. We have about 32% market share in the truck. We're very ingrained in those two markets. We do a lot with growing wallet share in there, but we need to grow in other markets. The two markets that are down today, truck and power trucks.
One of the benefits when we talk about tariffs, we are USMCA compliant. We had three days' worth of tariffs, and that was it. We hope that continues. We have long-term relationships with big blue chip companies. All of our products are proprietary and high-end products. Most of our products, when the customer pays, they pay for the tooling. The tooling could range anywhere between $2 million-$35 million for a project. There is one set of tooling, and there is one supplier for those products. Look at the addressable markets, and I would say where we are with defending growth, power sports absolutely is a defend market for us, especially personal watercraft. The area we see growth is golf carts. It is amazing what you see them do with golf carts nowadays. Rims, low-noise tires, stereo systems, refrigerators.
Now you can really add value for a golf cart. Fifteen years ago, a golf cart was something no one cared about. Now they do. Now you can add value. I think my parents live in a, one of the largest communities on the East Coast, and I think every other house has a golf cart. Construction and ag, we'll talk about what we're doing to grow into there. We've introduced paint into our Matamoros facility. When you look at construction and ag, we're combines, harvesters. They're big parts. We can mold the part, but if we don't paint, then you can't get to sale. Listening to the voice of the customer truck, they don't want you to paint because they paint themselves. Con Ag, John Deere, Cadet, CNH, AGCO, they all want paint. That was preventing us from getting to market.
If I look back at Core six years ago, business came to us, right? Business came into Core because the truck needed another program. They came to Core, and it was easy, right? Now, inflation, but easy. Power sports truck, we still stay in truck. We do not necessarily want to grow in truck. It is a good business for us as far as cash flow, as far as you know what the volumes are going to be. You know how long it is going to be. We still get consumer product, packaging, industrial utilities, and building products. Overall product sales, 34% are Mexican facility, Matamoros. That is right across the border. That is by far our largest facility. Columbus, Ohio, which is the headquarters. And then we have facilities, another facility in Monterey, Mexico, Cayce, South Carolina, Winona, and Coburg, Ontario. The area that we are missing is out in here.
When we start looking at acquisition, that's the area that we're looking to do the acquisition. Our parts are very large, so logistics does matter. Some of our customers, in the truck, we really do business with all the customers, some more than others. I'd say Navistar International is our largest customer at the moment. We still do a lot of business with Volvo, PACCAR, and we have all the Hino truck business. Power sports, we do it with Yamaha, BRP, Polaris. I want to see Club Car and E-Z-GO on there soon. Building products, decorators used to be a UFP. We do all the lattice with UFP. We'll go into later some of the new products that we're working with UFP, you know, fake rocks. I never knew there was more than a $10 million market on them, faux rocks. No validation, easy, right? Quick sale.
and then really industrial utilities. Generic, we see a lot of growth there with the generators. Also design on the water treatment. How we diversify, really growing into power sports, industrial and utilities. We do troughs that go along the rail line for data energy transmission along the rail lines. Stormwater drains, fan blades, even outdoor equipment, decking, and then obviously lattice and everything in the backyard. That brings us to where we are today. When I talked about kind of the story of Core, what we were doing, we were purposely putting ourselves in a position to be able to invest for growth. You see a lot of companies that say, "Oh, we got to grow, we got to grow," but volume makes a mountain out of a molehill. The problem back in 2019, it was a peak year for truck.
Everybody wanted, truck. They wanted you to run their trucks before you run somebody else's. We were not able to do it. We had too many quality problems, too many delivery problems. We were shutting customers down. If we kept saying at that time, if we had less volume, we would be able to fix it. You cannot, right? You just cannot stop and fix it. You have to do it at the same time. The patience living as you are working on it. If I look at where we are today, we have an organization of plants that are prepared for organic growth and inorganic growth, are profitable, and have cash to invest, whether that is acquisition or assets. We really need to drive the voice of the customer into the organization and understand the customer's problems to solve.
I think when you look back, we never really invested in sales because they did not have to. Core never had a sales department. You just had people that took orders. They would come in and talk with engineering, and you got the next truck quickly, right? There was no purposeful way of going out and growing the business into the industries that are best, have the best ROI, right? That is what has changed. When we talk invest for growth, we are growing our sales force. We have added a chief commercial officer. Never had. We are adding account managers and business development managers. Account managers are the ones that are taking care of your large existing customers. Business development are the ones that are hunting and going out and grabbing the new business. We have invested in the sales function.
We actually had two business development managers hired this week and account managers hired prior month. Then really focus on growing wallet share with high-value solutions. It sometimes amazes me. We talk with one of our customers like PACCAR, and they ask, "Do you do DCPD?" It's a reaction injection molded process. I was like, "Yeah, we supply you with DCPD." It sometimes it really is amazing that how much you really need to tell them what you do and how you do it. We need to do a much better job with that. You see Eric and his team along with sales, we're going out and doing lunch and learns with customers. We're going out and meeting with customers. We're showing, bringing them into the plant, doing, you know, engineering reviews. That's where they start seeing all the things that you can do.
It really does take them. To strengthen Core's technology function. You know, we're a solution sale. You know, we come in, we have to solve a problem and solve that problem with a solution, with a composite solution. You need a good Core technology function that can come into the customer, know what the opportunities are, what's the next best alternative, and how we're better. Acquisition, the number one priority for acquisition is sales channel access and then footprint expansion. If we can get sales channels that has a, if we can buy a company that does large parts, let's say 1,000 tons or more high-pressure injection molding, does large parts, is somewhere in the west of Texas, closer, further away from our other plants, that's technical in nature. The big thing when you start looking at some of our parts, we're structural, right?
We're the composite. If I look at a unibody for something that we're looking at, this is early in the design phase, right? We know what's being done early. Everything that covers this is aesthetics, injection molding, or carbon fiber, right? We already have the structural part. We know what goes on next. We're earlier in the design phase and then come back to competition. Then complementary technology and resources. We still want to be in molding. We still want to be able to build out our portfolio. Steps to driving more organic growth. We restructured our sales department. When we talk about the next must-win battle, it's about sales. What do we have to do to grow sales? We've changed our org structure. We've invested in our sales force.
We're looking at new opportunities to best utilize our resources, really ROI, priority rank, everything that we're going through now. It used to be very, it used to be very opportunistic. Yeah, we could do that. We do it, right? Now that one is in the market we want to be. It has a higher margin and higher future potential. That's a green. That one's yellow. Work on that one and not that one. Train and bed the value selling methodologies. I don't think we were as purposeful as we had to be. We did what we did because it worked. Build out the value proposition, how to win. And I think what's important today, as of today, now we put this out last night so that we could talk about it here. We won $30 million of incremental new business just this year.
I would bet everyone in here a coat that we'll win the Volvo program, which is another $20 million. That's just this year. I believe it's working, or at least we have one data point that says this.
When does the revenue on that $30 million start to flow through?
What's the revenue?
When does it start to flow through?
You'll start seeing this. Our cash to quotes, our quote to cash cycle is fairly long, on most of the products. You're probably looking at anywhere from 12-18 months. What we're launching this year, we won last year. We won $45 million worth of business last year, and we'll start seeing that coming online by Q2, Q3 of this year. Now we'll ramp up. Now we get into some fun stuff. Automotive, the new EV truck coming out.
When you look at what we're able to do with the cargo beds, the bottom of the bed, the sides, and that, you know, they're predicting 150,000 units of that a year. When we say $30 million, we say we'll probably, we toned it down a bit. We say it's probably about 30% of that at first. I don't know if they'll get 150. They think they will. An exciting part, and I think Eric will kind of talk about this here. When we start talking, part of the challenge that we have with our sales is that it is long-term. When you're designing a product that has to be validated and then the final product has to be validated, that's where you get 12 months-18 months. We make SMC. So that's a sheet molding compound. We make the raw material for this.
We can do about 100 million lbs a year. And that's used in construction for doors. So doors that you see, the outside of the door would be SMC. The inside would be a cardboard honeycomb structure with another layer of SMC on the inside of that door. So any Home Depot or Lowe's. Maybe Eric want to walk through and show what we're talking about?
Yeah, I was hard to upload the video. So I got a video just to take you on a little tour of one of our plants. and I'll walk through. But this is how we make sheet molding compound. So we make the compound ourselves, pulling glass fibers up through tubes. Then we're chopping it, with two rollers. We're chopping it into one-ince fibers. Those fibers fall into a glass bed. so we're mixing the resin, the glass, the fiber.
When we say sheet, that's kind of what the sheet looks like. It's quarter-inch thick, 48 in wide, continuous for literally thousands of feet. We'll cut it and put it in bands. That's what our sheet molding compound operations are. Who do you buy the raw materials from? Someone like, resins from some of the big resin guys like AOC, Reichhold, INEOS, who just, bought by all of those. New name is all with deposits. Some of those guys, Lanxess, Owens Corning, they have the biggest North American glass plant. It's in Mexico. Then, some ceramic fillers and stuff, some very small glass.
The beauty of that is it's short-term, meaning that we can win the program and we started production with that in May of this year.
Because you're making a product that then gets molded.
Now, molding a door is pretty straightforward. It's a rectangle. There's really not a lot of value in molding a door. Making the SMC, and if you take this around, we formulate the SMC, which is similar to baking a cake. We put all the components in there, and you can make SMC, and they're the same strength. If you want high performance, you'll pay for the lighter one. Eventually, five years from now, eight years from now, everybody will be in a lighter one, and there'll be a new lighter. Right? What we do, we have one that's in between those two for those who don't want to pay for the high end, and they want to be something in the middle.
How much of a secret sauce is in the formulation of this?
It's all about the secret sauce.
That white one is something that's proprietary for us. We're actually using, it's a certain formulation of what we call microspheres. It's like fiberglass bubbles at a micro level to get that density.
It's fairly hard for competitors.
Yeah. And it also is good for fire prevention because you got air, heat transfer.
Is it patented?
Excuse me.
It's not patented.
It's not that. The formulas are not patented.
If you patent it, everyone will know your formula. Kind of like Coke.
Oh, okay. Consider it more of like a trade secret, like a Coke formula or something, right? We know how to make it, but we don't want to tell everybody how to make it. Sure.
Yeah. Even the people running the lines, it's material A, this %. Everybody wants to know your formula.
And how many other people make SMC like you do?
I'd say probably and sell it probably four or five. The biggest manufacturer of SMC is Kohler. When that's for their own, it's captive. So they see SMC as part of their value proposition. When you look at a tower, a tub, or shower, you know, they want to get that nice white, clear finish. So they make their own SMC. Companies like IDI, they sell, make and sell SMC, and that's all they do. A lot of it's low volume and smaller batches is what you'll see new people getting into SMC. It's usually small batches, lower volume. Even for us, if it's 5,000 lbs- 10,000 lbs, sometimes we'll have somebody else do it if we already know the formula. We have two large automated SMC machines. We can do a little over 100 million lbs of SMC a year.
Until we did all the turnaround, SMC was only for internal use, right? We made just enough SMC for all of our truck business and personal watercraft business. Now we're able to produce much more SMC, many more variants, and at a much more efficient cost. That is why we're selling it out externally now. See a lot of demand for it. Also, on EV battery enclosures, you know, especially on municipal buses. What we make, this battery enclosure goes on top of the bus, comes in, robot picks it up, puts it in a charger, another robot grabs another battery, puts it in, and it's done. I think EVs do well in markets like this where you know how far you're going to drive, you know how long you're going to drive, and you got a standard way to put, retain the battery in and out of charge.
I'm sorry. Other areas that we're getting into are medical, hospital beds. It's taken us a year and a half to get in here, but the structure underneath that bed is structural foam. And then if you look at why we would do injection molding, this part here is injection molding because you don't need the strength. You need to know the structure of the bed and how it's going to be shaped first. Vehicles, we still do truck. We do a lot with what we're seeing at ATVs, UTVs. The recreational side is down, but the commercial side is actually doing pretty well. Landscaping companies, other construction companies, you look at things like John Deere Gator where we do the bed. This bed is the same thing as you're doing here. It's a direct carrier.
How high can your gross margin get?
How high
can your gross margin get?
Definitely higher than what it is. I would say, for sure, truck is by far our lowest gross margin business. Everything that we're going after is higher margin. It makes sense because truck has been doing composites for 30 years. They have very sophisticated purchasing departments that their sole job is to put you out of business. You're really designed for manufacturability. They have the design. There's no, the next best alternative is another supplier. When you do things like this, like this carbon fiber, that bed, you know, being able to make SMC that actually looks like wood, that's where you're at.
What percent of your product has above the 20% gross margin?
Everything other than truck. Yeah, truck. Before we did the price increases, truck was, is a business you shouldn't get out.
You shouldn't do it. We are selective about what we take in truck today. I think a really good story, maybe Eric can kind of go through what we did with the carbon fiber.
I'll show you a nice picture of a tool that we made too. This carbon fiber part that Dave is showing is a PowerSport vehicle. You can tell personal watercraft. When the customer came, they were not able to get enough parts. Most of the people making carbon fiber are making race cars and airplanes. They wanted a lower-cost solution and somebody that could keep up with the demand for all of those units. We took an actual part, made a tool off of it. The green and red part you see there, we actually can make fiberglass tools. We have a very competent fiberglass organization and make a lot of parts.
We've made a tool off of that. And then what we did, instead of taking a pre-preg carbon fiber, if you're familiar with that, you take autoclaves and stuff to build race cars and airplanes. It's a very difficult, very expensive process. We didn't do that. We took the fabric, put it in the tool, and then transferred the resin in after. We call it resin transfer molding. That's very similar to the way we make truck parts. We were able to do that for approximately half the price of what they were getting for that carbon fiber part, turn it around in a month, four months. So they've awarded that business to us starting next model year, next year. It's already led to them coming to us and asking if we can do the mirrors for the same vehicle now. So the hood covering and the mirrors.
Do you think there'll be other opportunities for more things like that using the technology? It seems this is kind of the first of the kind.
I think it's the first one. We might tell you there's probably nobody doing this because we really took our experience in making low-cost, lower-cost truck parts and crossed it with carbon fiber. It is unique to the industry or to the world. Everybody that makes a PowerSports vehicle or even an automotive, if you pay extra to get the platinum or the premium or the, you know, whatever model, in this case, they call them the X model, the spring order with 300 horsepower, they want to have something unique on it.
When you pay that $20,000 for your jet ski, I got the carbon fiber hood and it's in the literature and I can tell my buddy I can make it to the other end of the lake faster than he can, right? All of them want to do special things like that. I got to go to Valcourt where their engineering center is. They put 20 people in that room with a few of us and learned about this. They had their ATV guys that are doing their off-road vehicles. They had their snowmobile guys. They were doing snow. They had their personal watercraft. They all wanted to know how we were doing it and whether they could apply it to their vehicles. Even just inside that OEM, there's already opportunities.
To be honest, three years ago, Core would have never done that because we would not have been there with the customer, with our engineers, with their engineers, going voice to customer. What is it that, what is your problems that you are facing today?
What are you doing with the job?
I am sorry.
What are you doing with the job that you are producing? What? Free cash flow this year?
I got a terrible hearing.
Me too. What do you do with the excess cash? We have about $25 million in free cash flow, $45 million in cash.
We want to invest either buying it, doing an acquisition like we had talked about, or we are investing. We have a couple of large projects.
If we win the Volvo, we would put a plant in Monterey, consolidate our current small plant in Monterey, and then grow that plant with the investment in Volvo with that business.
What multiples do you pay typically for businesses?
I'm sorry.
What multiples do you pay for businesses when you acquire?
Yeah, everything that we're looking at right now is somewhere between six and seven. Our multiple right now, if you look at us, are four. So the challenge we have to overcome is if we buy a business, how can we scale that business, either go in and do an operational improvement and get the savings from a material side, an operational side, or are we able to grow those sales channels faster?
Why not buy yourself back with Ford?
We are buying our stock back today.
Yeah, we have the problem with buying stock back is the SEC puts regulations on how much you can actually buy. You're only allowed to buy a certain percentage of your last 10 days' trading volume.
Whatever. I think you can buy back as much as you'd like.
Right. Yeah. We buy back as much as we can every day.
On that carbon fiber example, is it functionally the same as carbon fiber? Like, is it as strong? Or is it a different material that looks like carbon fiber?
No, this is 100% carbon fiber. We'll get the same carbon fibers that you would see in a race car and airplane.
So it's a replacement for the...
The way we're making it, it's definitely a dust and water shield. Like, it's not structural to the vehicle. And so we've taken costs out because that's what it's used for.
That's all they need. That's what they need, right? They want it. They don't want it to be... Because we offered, "What about glass with black pigment?" And they said, "No, no, no. We want the literature to say carbon fiber. We want it to be carbon fiber."
90% of the carbon fiber you see is only aesthetics. Don't need it. Those are areas. We're doing the same thing with faux rocks, right? You see faux rocks out there. We did. Our team put together the same process to be able to start making faux rocks. I never thought there was a $10 million market in fake rocks, but there is. These are just some of the products in the value proposition we have. We do all the hulls for the Yamaha high performance. This product is a BRP Switch.
This is a DLFT, a fiber reinforced composite, and a structural foam. Only we could do this because we take two different processes and make this together. We can do an entire boat hull in one shot. We have presses up to 5,500 tons. Light weighting, you see a lot with the storm drains. We talked about those. The vaults for fiber optic and data transmission. Really, when you start looking at what we can do, this was a runner board that had 43 components. If we mold it and activate the mold, you can get all that in there in one part. The value proposition is you're reducing the customer's labor. Again, we mold in all the engine mounts, fasteners, poles, everything in that hull. All these, when it gets to the customer, all they're doing is bolting everything in. No fasteners. It's already done.
Y-Core Molding, I think a big part of it, culture is a competitive advantage. When I talked about our must-win battle as far as people, our turnover is actually less. HR got upset because 8.6 is about six months old. It's less than eight now. That's huge cost savings. Significant. Again, large, difficult parts. I'm going to hand it over to Alex to go to our financials before I take up all the time.
Sorry, John Morton.
I know. Start talking about shut up.
All right. We really have a four-pronged approach when it comes to our capital allocation structure. First one being organic growth. Second one being inorganic, return capital to shareholders, and then also maintaining a strong balance sheet. Like Dave said, our must-win battle in the current year is to invest for growth.
We're going to do that with a very disciplined approach. We target a return on capital employed of 14-16%, and that's a pre-tax measure. Return on shareholder or return capital to shareholders, like the gentleman in the back said or asked about, we're currently doing a stock buyback. Through 2024 and 2025, we've purchased over $5 million of stock. We have about $2.5 million left. We can buy that over the next 18 months. Maintaining a strong balance sheet. At the end of March, our cash balance was $45 million and our debt balance was $21 million. We really believe that any opportunity that comes our way, we can take advantage of. Moving on to the P&L, we've really focused on improving profitability over the last three years. Our adjusted EBITDA has been above 10% the last two.
We have kicked off a return on capital employed within that target range of 14%-16% over the last two years. We have been able to do this with operational efficiencies and really looking at our customer portfolio and doing a FOGO kind of approach. The profitability has kicked off a ton of cash flows. You can see over the last three years, we have averaged $17 million of free cash flows while spending $5 million on average on growth CapEx. We have kicked off over $89 million of operating cash flows over the three years. We believe right now we have the capacity to do somewhere between $425 million-$475 million of sales. Any growth CapEx from here on out would really be because we do not have the right size press or the right process in the right location for the opportunity.
Our long-term financial goals in the next five years, we're really looking to achieve $500 million of sales and an operating income of 8%-10% while still achieving our return on capital employed between 14%-16%.
Three minutes left for questions. Any other questions?
You kind of mentioned you're working on margin, working on profitability the last few years. Margins flat or down a little bit?
For Q1, we were up year over year. We achieved 19%. Loss leverage, obviously, with sales going down. We've given a target range this year of 17%-19%. As sales come back and fill our capacity, we do think we could achieve over 20% in the low 20s.
You spoke about stock buying back. There's any number of institutions that will not buy your stock because you don't pay a penny dividend.
Why not expose yourself to the wider universe by paying a modest penny dividend?
That has always been quite a discussion with our board. And when I talk with investors, I mean, would an investor prefer a stock buyback or a dividend? I have had some investors say they do not want a dividend because you just create a tax event for me. I want your stock price to go up or buy the share back. I mean, for us, you know, if you are going to do a dividend and you are not going to be 3% or 4% on dividends,
I am not so sure it really gives you a lot of benefit.
With two institutions, you will not touch your stock without a candy dividend.
I am sorry.
There are many institutions which will not buy your stock because you are not paying the candy dividend.
Yep.
I mean,
if you pay a modest candy dividend, they will buy your stock.
Yeah. Yeah, that's... We're going to finish up the share buyback and make a decision whether we do dividend or finish up the share buyback right now.
You can do both.
I agree. I agree.
You mentioned the customer pays for the tooling.
Yes.
After the job is done, what happens to the tooling? It seems to me there's some IP involved with that tooling. Can you read me?
Usually, it depends on the product and the service life of that product. So a lot of times it'll be kept for service at low volume. And usually you're decommissioning most of it, unless the part that you need for service. If you don't have service requirements, we are actually required to cut it up and just bar the numbers. Just so somebody else doesn't take it.
Right. Yeah.
All right.
Questions?
All right. Thank you for your time. Thank you.