Good morning, everyone. Welcome to the Core Molding Technologies first quarter fiscal 2023 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then one on your telephone keypad. To withdraw your question, please press Star, then two. Please note this event is being recorded. Now, I will turn the call over to Sandy Martin, Three Part Advisors. Please go ahead.
Thank you. Good morning, everyone. We appreciate you joining us for the Core Molding Technologies conference call to review first quarter results for 2023. Joining me on the call today are Core Molding's President and CEO, Dave Duvall, and the company's EVP and CFO, John Zimmer. This call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the investor relations section at coremt.com. Today's call, including the Q&A session, will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading.
I would also like to remind you that statements made in today's discussion that are not historical fact, including statements or expectations or future events or future financial performance, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature are uncertain and outside of the company's control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued today for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Core Molding Technologies assumes no obligation to publicly update or revise any forward-looking statements. Management will refer to non-GAAP measures, including Adjusted EBITDA, free cash flow, and return on capital employed.
Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. Finally, the earnings press release we issued earlier today is posted on the investor relations section of our website at coremt.com. A copy of the release has also been included in an 8-K submitted to the SEC. Now I would like to turn the call over to Dave Duvall. Dave?
Thank you, Sandy. Good morning and welcome to our first quarter earnings call. I first wanna thank the Core Molding team for our outstanding financial results. It is a direct result of a hardworking team of skilled people driving our business in a shared direction with a passion to improve every day. It is exciting to see our business transformation progressing, especially when you can feel the momentum of the change increasing. As we stated in March, one of our key strategic goals for 2023 is profitability improvement. The direct measurement of this is reflected in our gross margin. I'm excited to communicate that our gross margin for the quarter was 17.8%. That's the highest in over five years.
This is a sequential improvement of 440 basis points from the fourth quarter, and an increase of 180 basis points from Q1 of the prior year. This was driven by our continued focus on operational execution in our challenged plants, material cost recoveries, and technical solution sales as we expand into newer markets. As we stated in March, our must-win battle for 2023 is to fully embed our operational excellence processes in all of our operations, with a focus on our lower performing locations. We are strategically focused on improving operational performance and specifically improving the productivity and profitability at all of our operations to optimize our current capacity. This is always never ending, but we know that we have some short-term opportunities to capture that will both improve our margins and open more capacity within our sheet molding compound business.
In Q1, we have increased our plant overall productivity by more than 8%. This is good progress, and I appreciate how focused our operational teams and plants are on supporting each other in driving our must-win battle for 2023. We also know there is still much more opportunity for us to capture before the end of the year. Now turning more specifically to the quarter. The team has worked extremely hard and focused on our four strategic goals for the year of revenue growth, technical solution sales, profitability improvements, and free cash flow generation. The first quarter results reflect our progress on these goals with strong gross margin and operating income improvements compared to last year on solid sales growth. We continue to see strength in our largest market, medium and heavy-duty truck, with increased demand during the first quarter.
The first quarter truck demand increase also includes business with a new truck customer, which was launched in the second half of 2022. In the first quarter, revenue mix shifted, leading to 50% of our sales coming from medium and heavy-duty trucks, with the new truck business contributing to this growth. We also saw an increase in demand in the powersports market in Q1, while building products has been pressured since the beginning of the year. The solid sales growth in the first quarter, 2023 compared to 2022 of 9.8% demonstrates the benefits from the company's strategic diversification strategy into new end markets. We also made significant margin improvement progress by delivering higher gross margins of 17.8%, which reflects ongoing achievements from our transformation process.
We continue to win and launch programs in the industrial and utilities categories, specifically a number of projects related to stormwater solutions, flush covers, and in-ground vault products, along with other industrial and utility projects that we expect to be in full production this year. We are excited about these launches because they represent differentiated, growing end markets where we provide high-value engineered solutions. All these projects drive margin enhancements and create a value differentiator with our customers as we improve product performance, lower costs, and reduce manufacturing complexities for our customers. We are also excited about publishing our inaugural sustainability report, which was posted on our website on March twenty-first. We do see more customer requests to support them on their sustainability path by either using recycled material or developing a recyclable solution, usually by converting traditional materials to a recyclable product.
Specifically, we have converted thermoset products or solutions which are not recyclable to thermoplastics, which are recyclable. This is aligned to our strategy of providing a technical solution that utilizes our wide portfolio of processes. Implementing our sustainability strategy has taken almost a year, and I am proud of how far we've progressed in this area. It is a journey, and I am looking forward to how we will integrate our sustainability goals outlined in our 30 X 30 targets into our business strategy, and I firmly believe this will enhance our customer and employee value proposition. We also expect to receive our EcoVadis certification in July, which further supports the value proposition of several industrial and utility customers. It makes us a more holistic and disciplined organization that is visibly aware of our responsibility to our employees, communities, and the environment.
With that, I would like to now turn it over to John to cover the financials in more detail.
Thank you, Dave. Good morning, everyone. As Dave mentioned, sales growth and margin improvements, primarily driven by a combination of volume and strategic pricing actions, drove higher free cash flows when compared to last year's first quarter. First quarter 2023 net sales totaled $99.5 million, up 9.8% versus a year ago. Product sales increased 9.4% versus the prior year period. Revenue increases were largely driven by higher customer demand, coupled with higher pricing to offset inflationary costs as well as new program launches. Gross profit for the first quarter was $17.7 million, or 17.8% of sales, compared to $14.5 million, or 16% of sales in the prior year quarter.
During the quarter, we saw that the combination of higher volumes and strategic pricing enhanced our overall margins, especially given the more stable labor environment and supply chains. We have also seen a weakening of the U.S., dollar, which had a negative impact on gross margins in the first quarter of 2023 of approximately 100 basis points. We actively hedge a portion of our exposure to the Mexican peso and the Canadian dollar, but we're still impacted by the change in the dollar. Selling, general, and administrative expenses for the quarter were $9.7 million, compared to $8.5 million in the prior year period. Increases were primarily due to year-over-year wage increases, primarily due to inflation and certain strategic additions to improve operations.
In the first quarter, the company reported operating income of $8.1 million, up 34.3% over the same period prior year. Net income was $7.8 million or $0.66 per share on a diluted basis versus the same period prior year diluted EPS of $0.46, an increase of 43%. Adjusted EBITDA for the quarter was $12.2 million or 12.3% of sales, compared to $9.5 million of Adjusted EBITDA in the 2022 first quarter or 10.5% of sales. We are pleased with our progress on Adjusted EBITDA, returning to margins of 12.3% for the first quarter of 2023, but we recognize we still have more opportunities for improvements.
You can find the GAAP to non-GAAP reconciliation tables at the end of our press release for the 1st quarter results. Turning now to the company's financial position, cash flow, and balance sheet. The company's cash provided by operating activities totaled $4.6 million for the 3 months ended March 31st, 2023. Capital expenditures for the year were $2.1 million, resulting in a positive free cash flow of $2.5 million. Due to seasonality, 1st quarter historically results in a reduction in free cash flows as working capital grows in line with 1st quarter sales growth compared to 4th quarter of the prior year. This year, we experienced an increase in working capital resulting from sales growth. We also generate free cash flows based on ongoing improvements we are making in the business.
We expect to generate free cash flows for the remainder of the year as working capital requirement changes from seasonality are not forecasted to be significant. With cash flows generated from operations this year, we plan to utilize approximately $13 million for capital spending in 2023. At March 31, 2023, the company had available liquidity of $54.5 million, which includes a combination of cash and cash equivalents and availability on revolvers and capital credit lines. The company also had term debt of $23.9 million at the end of March, and our debt to trailing twelve-month Adjusted EBITDA ratio remains less than 1 times Adjusted EBITDA at the end of the first quarter. As I mentioned a few moments ago, our working capital investments were well managed and netted to $38 million as of March 31.
We ended the year with accounts receivable of $52.5 million with a DSO of 48 days. Inventories were well controlled and remained less than 1 times accounts payable at the end of March. Our return on capital employed, a pre-tax return metric, improved to 22% on an annualized basis, driven by a disciplined use of capital. We plan to strategically manage our capital deployment in a prudent manner and believe that a combination of good liquidity and strong balance sheet provides flexibility to focus on our four strategic growth initiatives, which are revenue growth, technical solution sales, profitability improvements, and free cash flow generation.
As Dave discussed, our strategic business transformation efforts progress. We continue to work on operational efficiencies at all our plants and higher margin technical solution sales to improve margins and reduce the impact of product mix shifts in our business. Our must-win battle for 2023 includes integrating major productivity and quality improvements, as well as scrap reductions, labor productivity, and the reduction of overhead spending. We're also focused on operational improvements with our new product launches, which usually take up to a year from launch to work out all the operational efficiencies. Our operational performance and efficiency goals target further gross margin enhancements as well as increased capacity, throughput, and return on capital. We are dedicated to core strategic growth and profitability goals with programs to drive long-term value creation. With that, I would like to turn it back to Dave for some final comments.
Dave?
Thank you, John. As both John and I stated earlier, our must-win battle for 2023 is to fully embed our operational excellence processes into our operations, with the largest opportunities coming from our SMC or sheet molding compound plants. We have communicated our strategic execution goals throughout the organization, which has placed a high level of focus and energy into driving speed and quality of event into our must-win battle mission. Improving our SMC plants is a strategic priority that will directly increase productivity, reduce costs, and expand our large asset capacity by about 20%, which we believe will create a stronger foundation for success as we prepare for future growth investments. As we continue to grow the business, we plan on adding capacity and are currently investigating how best to add capacity, either through acquisition, facility expansion, or greenfield site.
The prerequisite to executing an expansion is the successful completion of our 2023 must-win battle, which creates both machine capacity and technical expertise availability to enable a flawless execution of our major growth objectives. Basically, it's just the five Ps of proper planning prevent poor performance. We are measuring what we want to improve and have achieved over 8% improvement in productivity in Q1 alone. Although this journey is never complete, we are making significant progress in 2023. We are also adding additional automation to support further production efficiencies, reduce costs, and increase capacity. Our 2023 outlook includes carefully monitoring customer forecasts and adjusting assets and labor utilization accordingly. We plan for and value revenue diversification by industry, which serves to reduce our concentration risks in all of our end markets. We are driving to further increase gross margins to generate incremental cash flow.
Our outlook this year continues to be optimistic, and we are forecasting to be flat to slightly up on our product sales for the year. Our technical solution sales strategy positions us well to take advantage of opportunities in various industries that requires new solutions, including opportunities resulting from government-funded infrastructure and sustainability projects. We have seen an impact on our building products industry demand from macroeconomic efforts to slow inflation, but demand from our customers in other industries remains unchanged. We will continue to carefully watch for demand impacts from interest rate increases and other macroeconomic headwinds, but believe our continued industry diversification progress will lessen the impact of any industry-specific downturn on our business. We again want to thank analysts and investors for their time and attention on this call, and we want to welcome your questions on today's call or on a follow-up call.
I would like to open up the line for questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Tim Moore with EF Hutton. Please go ahead.
Hey, thanks. Morning, Dave and John. Congrats to the whole team on a great quarter of execution. Wanted to start with margins. You sound fairly optimistic on the margin front. Obviously a great quarter. JustMaybe you can remind us on sort of seasonality mix and sort of ramp of new programs and any factors to take into account on margins or near term?
Morning, Chip. you know, margins first quarter 17.8%. Obviously, you know, we're pretty happy with those. We are seeing the benefits of a lot of the must-win battles that we talk about. you know, historically, seasonality Q1, Q2 are always gonna have the best margins just 'cause of the product mix. you know, when you look at even versus last year, you know, being up from 16%, I think first quarter, which kinda indicates normal product mix, you know, you can see some of the benefits that we're seeing from our operational improvements.
You know, going forward, you know, we would expect those operational improvements to kinda show up in every quarter, you know, and, you know, but have normal seasonality with that, where the back half of the year margins usually are just a little bit weaker than the first half just 'cause of product mix. You know, a lot of the operational improvements that we've seen are, you know, sustainable, ongoing operational improvements that we would expect to be there for the rest of the year.
Got it. That's great to hear. Then if I could ask another, around sort of future capacity expansion, which you referenced those potential efforts.
Mm-hmm.
You know, macro not-notwithstanding, obviously we're all watching that, but curious around maybe bidding pipeline, what you're seeing out there, and how that's progressed and how that may impact some of those efforts.
Yeah. Chip, this is Dave. You know, we're looking at that right now as far as developing a pipeline. We've outlined a strategy, working, looking at different individuals or companies, investment banks on how we wanna proceed with that. It's definitely in our interest to expand the business and being able to organically add the capacity with the rate that you can purchase machines is probably slower than what we want or is possible for us. We've really, within all of our locations, we've filled all the spots or mostly all the spots that we have, so our next step is either brick-and-mortar or acquisition. I think what we wanna do is we're probably looking more towards the acquisition side just because of the speed and ability to implement.
Understood. Yep. Obviously, the balance sheet is in good position. I guess maybe a last one for me on end market-wise, you referenced sort of, you know, seeing some impacts on the lattice and things like that. I guess curious other markets if you're hearing anything, right, particularly powersports, with the higher interest rate environment? Thanks.
Yeah, we had thought, and just like you, especially at the beginning of the year, that we were gonna see a significant decline, but we have not. Right now, we still see orders strong. We are anticipating that at near the end of this year, in the second half, that would start having effect, but right now we see strong volumes.
Yeah.
Got it.
we honestly
Go ahead.
Chip, we stay really close to our customers, and to tell you the truth, we're talking.
Yeah
...to them all the time. They're pretty bullish still. You know, we've had some small adjustments so far, in personal watercraft, but nothing major. In ATV, we really haven't seen any major adjustments at this point. You know, we're staying close to the customer to, you know, get their data as fast as we can.
Perfect. Yeah, I was gonna follow up and say, based on your product sales outlook, it sounds like you have pretty good visibility then on that for the year.
I think we do. Again, most of our customers give us forecast out extended period of time. I think they're all in the same boat as us, though. That they're watching-
Yeah
...the economy, but they can see in their distribution channels, their inventory levels, things like that. They have probably a little bit more visibility. You know, again, I think they're all rational also. Right now, it seems like when people have jobs, they're gonna still spend money. Right now, I think customers are still spending money at least.
Great to hear. Sorry, maybe one last one, if I could. Sort of in the utilities infrastructure world, are you seeing that, you know, or on the technical solution side, are you seeing that sort of early opportunities start to grow? Would that be a potential, you know, source of acquisition, opportunity? Thanks.
No, absolutely. When we start looking at whether we wanna grow processors or sales channels, that's what we're looking at. We definitely see industrial utilities infrastructure as a significant area for growth for us.
Perfect. Okay, I'll hop back in. Thanks very much, guys.
Thanks, Chip.
Again, if you have a question, press star then one. This concludes our question and answer session. I would like to turn the conference back over to Dave Duvall for any closing remarks.
Yeah. Thank you, thank you for your continued interest in our company, and we look forward to providing an update of our progress when we report second quarter results in a few months. Conference call is already scheduled, later this week and next week. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.