Good morning, and welcome to the Core Molding Technologies fiscal 2026 third quarter financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Sandy Martin, Three Part Advisors. Please go ahead.
Good morning, everyone. Thank you for joining us for the Core Molding Technologies conference call to review our fiscal 2026 third quarter results. Joining me on the call today are the company's President and CEO, Eric Palomaki, and CFO, Alex Panda. This call is also being webcast and can be accessed through coremt.com via an audio link on the Investor Relations Events and Presentations page. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading. Statements made in today's discussion that are not historical facts, 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 are uncertain and are outside the company's control.
Actual results may differ materially from those expressed or implied, and today's earnings release includes our forward-looking disclosures. Risk factors and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Core Molding Technologies assumes no obligation to update or revise any forward-looking statements publicly. Management will refer to Non-GAAP measures, including adjusted EPS, adjusted EBITDA, the debt-to-trailing 12 months EBITDA ratio, free cash flow, and return on capital employed. Reconciliations to the nearest GAAP measures are available at the end of our earnings release, which has been submitted to the SEC on Form 8-K. Now, I would like to turn the call over to Eric Palomaki. Eric?
Thank you, Sandy, and good morning, everyone. As many of you know, we hosted a successful Investor Day in September, where we outlined key initiatives supporting why Core and why now. Over the last several years, we have systematically strengthened Core by improving execution, deepening customer relationships, investing in our people, enhancing our manufacturing network, and expanding our commercial capabilities. We believe these efforts have positioned Core to enter its next phase of growth, leveraging a proven operating platform to pursue larger opportunities with additional capacity and to build on even greater diversification across our end markets. Over those two days in Brownsville and Matamoros, we communicated a clear objective to accelerate profitable growth, generate increasing levels of cash flow, and deliver attractive returns on capital for our shareholders. Our experienced teams work across materials, engineering, designs, manufacturing, quality, and operations to solve customer problems and execute complex programs.
With culture as a competitive advantage, we have captured some of the industry's highest employee retention rates, with employee turnover at an all-time low, just below 7% for the year. During 2026, we are investing a total of 18,000 hours in employee and internship training and management development. The vast majority of our leadership roles have been filled internally over the last several years. These purposeful investments in our team continue to strengthen the culture that we view as Core's highly competitive fortified moats. We hold ourselves accountable through a measured scorecard that tracks both financial results and operating indicators that drive long-term performance. Improvements such as safety, quality, cost, delivery, and customer satisfaction, talent development, and commercial execution are helping us build a stronger company and support our long-term growth and objectives.
Turning to our third quarter results, the investments we have been making across the business translated into strong commercial momentum and revenue growth. Production sales grew 19.7% year-over-year, and total net revenue, including tooling, expanded by over 54%. year-to-date, we've secured $30 million in new wins as we continue to execute on our invest-for-growth strategy. Depending on the timing of the fourth quarter awards, we remain on track to achieve our full-year objective of $50 million in additional new wins. As expected, margins were impacted by the mix of tooling revenue and one-time commissioning costs as we ramp up our Mexico expansion. This year's must-win battle included successfully executing our Mexico expansion strategy while continuing to optimize our manufacturing footprint.
Today, Monterrey is fully operational, producing structural foam, structural web, and DCPD products with integrated paint capabilities, while two new 4,500-ton presses in Matamoros remain on track to be operational by year-end. At the same time, we are optimizing our manufacturing footprint by advancing our center of excellence strategy by consolidating hood and battery enclosure systems in Gaffney, South Carolina, which Alex will discuss more in a moment. Together, these initiatives expand capacity, enhance operational efficiency, and create a scalable platform for future growth across multiple end markets. Importantly, we executed these projects with minimal disruption to customer service or our ongoing operations. Our teams continue to deliver strong performance across the network while simultaneously installing new capacity, relocating assets, and preparing for future program launches. I am exceptionally proud of what our team has accomplished so far this year.
Successfully executing a greenfield startup, expanding capacity, optimizing our manufacturing footprint, and supporting our new program launches simultaneously required tremendous commitment and operational discipline. The professionalism and dedication demonstrated across the organization give me great confidence in our ability to execute the next phase of the growth strategy. With that, I'll now turn the call over to Alex to review the financials in more detail.
Thank you, Eric, and good morning, everyone. For the third quarter, production sales grew by 19.7% year-over-year. The medium and heavy-duty truck vertical increased by 44.8%. New program launches increased building product sales by 17.7% year-over-year, and industrial and utilities end market revenues grew by 21.5% over the prior year. As we discussed with investors in September, a major tooling project contributed revenue earlier than originally planned due to a change in our revenue recognition methodology for a customer. Higher production volumes improved fixed cost absorption. However, margins were impacted by the unusually high mix of lower margin tooling revenue and Monterrey commissioning costs. Excluding the tooling mix impact and one-time commissioning charges, gross margin was approximately 18.6%, consistent with our historical guidance of 17%-19%.
SG&A expenses were $11.8 million, or 13.1% of sales, and excluding $1.8 million of one-time Mexico expansion and footprint optimization expenses, SG&A would have been 11.1% of sales, compared to 13% in the prior year period. As part of our portfolio footprint optimization efforts, we expect over $1 million in annualized savings beginning in 2027, which I will discuss more in a moment. Operating income for the quarter was $1.6 million compared to $2.6 million in the prior year period, reflecting elevated SG&A investments discussed above. Net interest expense was $39,000 in the third quarter, compared to $34,000 in the prior year quarter. The quarter's tax rate benefited from country mix and the impact of Mexico-related expansion expenses. Net income was $1.5 million, or $0.17 per diluted share. Adjusted EBITDA was $6.4 million, representing 7.1% of sales, compared with 11% in the prior year period.
Our results reflect deliberate investments that position us to deliver accelerated growth, capacity, and positive cash flow in 2027. We generated net cash provided by operating activities of $3.4 million during the first nine months of the fiscal year. We are carefully managing elevated working capital tied to new launches and higher production levels. Capital expenditures to date total $19.7 million, primarily related to our Mexico expansion initiatives. For full year 2026, we expect capital expenditures to be $28 million-$30 million, with approximately $20 million related to our Mexico expansions. As Eric mentioned, our work in Monterrey is now complete, positioning us with meaningful capacity to support launch programs and future growth opportunities. We ended the quarter with $5.4 million in cash and $4.8 million outstanding on our revolver. Our balance sheet remains a significant strategic advantage.
We have substantial liquidity, minimal debt, and ample flexibility to support future growth initiatives. Our capital structure includes a $50 million revolving credit agreement and a dedicated $50 million delayed draw acquisition facility, both of which provide us with meaningful capacity to pursue attractive M&A opportunities while maintaining a conservative financial profile. Return on capital employed was 5% based on trailing 12-month pre-tax operating income, which is impacted by our one-time investments. As we continue to launch new programs, we expect this metric to improve by leveraging top-line performance more effectively and driving higher asset utilization and returns. We fully expect return on capital employed to strengthen to our long-term goal of 14%. Additional details, including GAAP to Non-GAAP reconciliations, are available on our earnings release. Given our confidence in the long-term outlook, we continue to repurchase shares during both the third quarter and October.
We repurchased 8,411 shares during the third quarter at an average price of $22.71. Then in October, we repurchased another 106,659 shares at an average price of $23.42. Our capital allocation philosophy remains unchanged. We will continue to invest in the highest return opportunities available to us, whether through organic growth initiatives, strategic acquisitions, or opportunistic share repurchases. With significant available liquidity and a growing pipeline of opportunities, we believe we are well-positioned to deploy capital from a position of strength while maintaining a disciplined focus on long-term shareholder value creation. Today, we are reiterating our fiscal 2026 guidance and continue to expect the following. One, total sales to be flat to up approximately 5% year-over-year, with $9 million- $11 million expected in total project revenue for the fourth quarter.
The majority of the $63 million new program awards secured in 2025 begin contributing meaningfully in the second half of 2026 and reach full annualized run rates during 2027. Three, truck production volumes continue to improve, supporting a more favorable demand environment heading into 2027. Lastly, full-year gross margin for 2026 is expected to be between 16%-17%, although fourth quarter may fall below that range based on tooling mix. Regarding non-recurring costs, the combination of the Mexico-related and portfolio optimization costs totaled $5.2 million through the first nine months of the year. With the majority of the work now complete, we expect $1 million of final optimization costs to be incurred during the balance of 2026. This footprint optimization initiative is consistent with the strategy we outlined in detail at our Investor Day, creating specialized centers of excellence across our manufacturing network.
Similar to Columbus for SMC compounding and Monterrey for DCPD and topcoat paint, Gaffney is becoming a dedicated hub for hood and battery enclosure systems. Concentrating these activities in specific facilities allows us to leverage decades of manufacturing experience, improve operational efficiency, and create a stronger platform to support future growth opportunities while generating meaningful cost savings over time. While this project will result in approximately $2 million in one-time costs for the 2026 second half, we expect it to generate recurring annual savings of approximately $1 million and enhance the business's long-term scalability. With that, I will turn the call back to Eric.
Thank you, Alex. One of the clearest indicators that our strategy is working is the commercialized business we've already secured. Over the last 18 months, we have won over $90 million of annualized revenue opportunities, spanning more than 30 new programs across a broad range of customers, markets, and applications. Importantly, 2/3 of those wins have come from diversified end markets outside of truck and powersports, validating our efforts to broaden the business while leveraging our core manufacturing and engineering capabilities. These are not theoretical opportunities. They are customer awards that are moving into launch and production, providing tangible visibility into our future growth trajectory. From the outset, we knew 2026 would be a year of investment, execution, and positioning the business for our next phase of growth.
We absorbed startup costs associated with our Mexico expansion, advanced our footprint optimization initiatives, and continued investing in people, capabilities, and infrastructure needed to support our strategic expansion. While those investments impacted near-term profitability and cash flow this year, these were intentional decisions designed to strengthen our competitive position and create longer-term value. Looking ahead, we believe 2027 and beyond represent the period when the benefits of these investments become increasingly visible through accelerating revenue growth, stronger margins, improved cash generation, and expanding returns on capital. As we wrap up, I would encourage investors to review our Investor Day materials if you have not done so already. The presentations provide a detailed look at the strategy, investments, and growth opportunities that are shaping Core's next phase of development and support our confidence in the long-term outlook for the business.
With that, I want to thank our employees for embracing change, executing at high levels, and maintaining an unwavering commitment to our customers. Their efforts have enabled us to undertake some of the most significant operational initiatives in the company's 30-year history while continuing to deliver to our customers every day. I also want to thank our customers, suppliers, shareholders, and board of directors for their continued trust and support. We remain focused on converting today's investments into tomorrow's growth, profitability, cash generation, and long-term shareholder value creation. Before we move to questions, I would note that we will be participating in the Southwest IDEAS Conference in Dallas on November 19. We look forward to meeting with investors and discussing the meaningful opportunities we see ahead for Core. With that, we will open the line for questions. Operator?
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will be from Chip Moore with Roth Capital. Please go ahead.
Hey. Thanks for taking the question, Eric and Alex. I wanted to ask, I guess more end market-related, particularly trucking. It sounds like confidence in volumes there is pretty solid. Maybe you can expand on what you are seeing. I know there were some emissions mandates out there, but what is your sort of view into early 2027 on the trucking side?
Yeah, good morning. Morning, Chip. Thanks for the question. On the end market for truck, there's no doubt all of the truck OEMs are increasing to the point where they're trying to increase and running into supply chain challenges. They would build even more trucks in the fourth quarter, I think, if they could. We have seen that probably for the last couple quarters. You will see by the end of the year, the entire year will be ramping truck quarter over quarter over quarter. All of them are anticipating the first half of 2027 to remain strong. None of them are forecasting, for example, an emissions change January 1, 2027. None of them are forecasting the first quarter to be low. They are expecting that demand to continue right into next year. We are excited about that.
From the emissions change, it seems as though I think that vote has not happened. I think it is sometime in November. I am not sure when the official response from the EPA will be out, but all of the OEMs seem prepared to deliver some of the 2026 technology into 2027 and have a period of transition. It will not be a light switch change on January 1st, 2027. I think that also helps lend confidence to a smoother 2026 into 2027 demand in the transportation industry.
Great. That is helpful. Maybe to follow up, Powersports, I think it was down a little bit in the quarter, although it is up here year-to-date. Just what are you seeing there with maybe the consumer is a little more challenged with some of the gas prices and things like that? Just curious on that side, what you are seeing.
Yeah, I think there are a couple things there. Certainly fuel prices and interest rate sensitive product. There is no doubt you have that overlying. Our year-over-year continues. You probably heard us a few times talk about that skid plate launch that is now about a year old, so you will now start to see that in every comparable year-over-year. That has been a huge increase for us. I guess, from a quarterly basis, we had a very good first quarter in Powersports. We probably noted that in our first quarter earnings, I believe. Q3 tends to be a little bit softer. So with our watercraft business, it is the end of the summer. They definitely are in their model year change in Q3, and then they start ramping up Q4 and Q1 to build next summer season, generally spoken as an annual type season for that watercraft business.
Perfect. I guess just in terms of the near-term awards, I think, right, to that goal of $50 million, it seems like you've got pretty good line of sight on it, specific projects, but obviously timing can play a role there. Just sort of handicap that and what you're tracking.
Yeah. Excited to be at $30 million of the $50 million. We'd like to be a little bit north of that. It seems like Q3, even last year when we look at the data, was a little bit less awards in the third quarter to us, and the fourth quarter was strong. In our pipeline, we have half a dozen projects that are kind of imminent, right? There's nothing else left to do besides our customers making that final decision, being willing to embark on new tooling project or new design or whatever each one of them happens to be. But we do have a number of them, and they do add up to make us get past $50 million. We're modeling that as that's our goal, and have some pretty good confidence around a few of them.
Great. Maybe one last one, and you talked a lot about this in good detail at the Investor Day, but future growth, I guess organic, inorganic, just updates where you might invest internally, and then just any update on the M&A pipeline. Thanks.
Yeah, thanks. I'll let Alex comment a little bit on the M&A, but I'll start with organically. We still continue to have so many opportunities, Chip, and we are, like I said, there's half a dozen projects that could happen in the next month or two, and we think a number of them will. It's just which ones and which ones bleed over into January or February. But we need to have capital ready for those, and there's some substantial presses or tooling jobs and things like that we will always prioritize that organic growth when it's an opportunity, because we really understand that part of the business and we have a lot of control over it. On the M&A side, we've gotten a look at a few, but I'll let Alex comment on it.
Yeah, we've looked at a few. Some of our SG&A costs in Q3 actually relate to us contracting some outside service consultants to help us through some stuff. But ultimately, we're still looking, and the key there is staying disciplined to our approach and requiring that 14%-16% return by year two is the goal. We're not going to go out of our way and lever up the company without making sure that return is there. We're still looking through it. We're still looking at different companies and going from there.
Got it. Loud and clear. Thanks very much.
The next question will come from Eric Volfing from Grand Slam. Please go ahead.
Hey, guys. Congratulations on everything you've achieved this year. You mentioned in the release that you had some win in the battery energy storage systems. Could you talk a little bit more about that? Is that sort of generally for the grid? Is that for data centers? Where are you seeing that rolling out?
Yeah. Good morning, Eric. Thanks for the question. We have won one major project that would be a grid infrastructure battery project. You think of that, the energy grid, especially in North America, probably needs a lot of upgrades. As the consumer starts consuming a lot of energy in the afternoon and evening, there is a high energy demand load. The idea is that you store that energy in industrial warehouse-looking buildings, like very large buildings that are just giant battery banks. They would charge on the evening and then be able to discharge during those peak energy requirement times. We would build the box that that battery is stored in.
It would be a molded, deep draw that is very difficult to make out of a metal, and you get a lot of advantages with composites of flameproofing, fireproofing, and your ability to design in, mold it in features in a single part. We have one of those that is secured and tooled up, and we are hoping it should be launching in the any day period. You would not see it in our P&L yet today, but that should be imminently launching. We are quoting another one with a competitor that is a very, very similar design. I would not say these are 100% or directly going into data centers, but there is definitely a lot of work on grid, data center energy.
The other project that I think is worth, that is very closely related is some of our flush cover vault business that we have both won this year through a transfer program. We went from transferring a tool from a competitor to us to revenue in under a month, which we are proud of anytime that can happen, because we often talk about the long lead time. As well as one of the other wins this year is with a new product, and we are launching one size of that technology in January and one in March of 2027. Those go in the ground, certainly are related to data center, related to grid, related to construction market, anywhere you are doing new residential homes. They are not putting that kind of thing on poles anymore.
It is all underground, and you need these vaults and flush covers every 500 ft, 700 ft for all of the interconnects. We love that composites goes in the ground, does not rust, does not oxidize. It is a great area for us, adjacent to both grid and data center.
That's great. Thank you so much for the color. Maybe a quick one for Alex. With all the stuff that's going on, do you think we might get to see some guidance for 2027 before the end of the year?
Yeah. Good question, Eric. We've been discussing that. Historically, we've given 2027 guidance in our March earnings release. Sandy, Eric, and I have all talked. We are going to put together a press release that announces it earlier. Right now, we're working on, do we do it at the end of December, or do we wait for the beginning of January? Right now, our game plan would be to finalize the budget, work with the board, and then give out some guidance earlier than we've historically done it. I don't know the exact timing yet, but I'm confident that the latest it would be would be January.
That's great. Thank you so much, guys. I appreciate it.
Yep.
Thanks, Eric.
Again, if you would like to ask a question, please press star then one. The next question is from Bill Dezellem from Tieton Capital. Please go ahead.
Thank you. A group of questions here. I just want to be clear that relative to the timeline for the $50 million of potential business that is in your sales pipeline, that each of those six you said could happen anytime in the next 30 days-60 days. Is that correct? Is there anything at all that you all need to be doing or can be doing to accelerate those wins?
Yeah. Hey, Bill. Good morning. Thanks for the question. Absolutely, there is always something we can be doing with any customer, so I appreciate that question and comment. The answer is yes, awarding in the next 30 days-60 days doesn't mean, as I think we have talked before, it doesn't mean that it produces revenue immediately. Some of them may have still nine-month, 12-month, 18-month lead time tooling or different projects. I can confirm for you for sure that some of our sales team last week was at a few of those customer sites. I am proud of the team for continuing to follow up, go make sure we are answering questions, coming up with creative ways. Sometimes they are asking us about creative ways to help them with a tooling project.
We are looking at ways that we can help them from an initial startup cost, let's say, for some of those non-truck markets. They are areas that aren't used to having tooling spend. Sometimes that is a little bit of a shock for them to have an initial tooling investment. We are trying to find ways that we can, as we talked about, use our capital for organic growth. That is something we have confidence in. If we can help a customer, we would be happy to do so.
Eric, taking that just one step further, what is your confidence level in these six wins? Is it just simply a matter of time, or is there still a competitive battle in place?
Some there is a competitive battle. Some of them, it is just time. I do not want to give you hard numbers, but there might be one or two in there that I would be 90% confident, but I do not know if it is going to be November, December, or it is going to wait until January. I do not know how many people are going to watch the news all evening tonight and watch all the statisticians all night and make their big investment decisions after they see what happens tonight. Those sorts of things certainly play into people's thinking when it comes to tariffs or building America. We have customers that are looking for all of those different aspects. I hope that helps clarify.
That is helpful. Relative to timing, on the tooling revenues, $25 million or so this quarter, what is the timing before those tools convert to revenue, or convert to revenue production?
Yes. The biggest tooling job for this third quarter is related to our investment in Mexico that supports Volvo roofs. We will be ready for one of those versions of roofs to be able to build a roof by December. We anticipate them to start ramping next year. Ultimately, that volume is tough for us to forecast. I would hate to give you a number, but we should be ready to start shipping initial roofs by the end of December or first week of January. I have not gotten to visit their new plant, but I do have an invite in December to go visit the Volvo plant, and so we will get our eyes on how far. I mean, they are building a 1.7 million sq ft plant just north of Monterrey, Mexico.
So, that'll be exciting to see and where the progress is, because ultimately, at least part of that is related to their success in installing their plant. Could be delays, could be pulled ahead. We don't necessarily know for sure.
Yeah, Bill, I think that's our biggest hangup right now too, and why it's difficult to forecast is, what is the progress on Volvo's plant? We talked back on the Investor Day, was, I think there's an opportunity to potentially ship some roofs back to the U.S. We haven't received an official green light from the customer on that, but we think that there's an opportunity there. But it's really going to come down to when is the Volvo plant down in Monterrey fully operational and starting to accept product. And we really haven't received a strict timeline on that from Volvo.
Great. Thank you for that. Then relative to CapEx, this year you're spending $28 million-$30 million. What is that number looking like at this point in 2027?
Yeah. So, we target sustaining CapEx is in between 3% and 3.5%. When I work with the plants and targets for 2027's capital budget, that's where we really want to be between. We will make exceptions, and if there's a project that has a higher level of return, that we feel that it's important to get done and to put in, will we go over 3.5%? Yes, but I can tell you right now, with all of the investment we've done over the years, right, I'm working with the plants to make sure that we are staying disciplined on those investments. And if I were to give you a number, right, I would say right now on average, we're right around $10 million on an annual basis with our current sales level.
Great. So basically, we are done with the larger CapEx numbers, and that we are now back to a more normalized rate starting next year.
Yes, correct.
Great. Then one additional question, please. Relative to your stock repurchases, I think you said that you bought a little over 8,000 shares in the third quarter, but over 100,000 shares in the month of October. Assuming that we heard you correctly, talk to us about the thought process and what changed in October relative to the Q3.
Yeah. We have a long-term strategy with the stock, the stock buyback, the repurchase program. Obviously, we increased the buyback price starting in Q4. Our stock price also came down a little bit in Q4, and so we were buying stock. I think the average was just over $23 at the beginning of Q4. What I can tell you is, when we communicated the stock buyback program, our target is $2.5 million a year. We have officially hit that, and we will not be buying any more stock for the rest of the year, and then we will be reevaluating in 2027, what price is appropriate and when we will implement that.
Great. Thank you both, and look forward to seeing you next quarter.
Thank you, Bill.
Ladies and gentlemen, this concludes today's question and answer session. I would like to turn the conference back to Eric Palomaki for any closing remarks.
Thank you for your continued interest in our company. We look forward to providing an update on our progress when we report on our fourth quarter and full year results in a few months. Have a great day.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.