Core Molding Technologies, Inc. (NYSE:CMT) Q2 2022 Earnings Conference Call August 9, 2022 10:00 AM ET
Sandy Martin - IR
David Duvall - President and CEO
John Zimmer - EVP and CFO
Conference Call Participants
Chip Moore - EF Hutton
Jeffrey Geygan - Global Value Investment Corporation
Justyn Putnam - Talanta Investment Group
Good morning, everyone. Welcome to the Core Molding Technologies Second Quarter Fiscal 2022 Financial Results Conference Call. As a reminder, this conference call is being recorded. [Operator Instructions]
Now I will turn the call over to Sandy Martin, Three Part Advisors, to provide introductions and read the safe harbor statements. Please go ahead.
Thank you, and good morning, everyone. We appreciate you joining us for the Core Molding Technologies conference call to review second quarter results for 2022. 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 the 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, 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 may also refer to non-GAAP measures, including adjusted EBITDA, free cash flow, return on capital employed and adjusted gross margin. 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 been included in an 8-K submitted to the SEC.
And now I would like to turn the call over to Dave Duvall. Dave?
Thank you, Sandy, and good morning, everyone. Before I get into the quarterly progress, I'd like to start by congratulating our Executive Vice President of Human Resources, Renee Anderson. Renee was selected as a 2022 HR Impact award honoree this year. If you remember, this award is presented to human resource professionals each year that exemplify excellence in leadership at their company as well as doing important work in the field of HR and communities where they live and work.
Renee absolutely embodies excellence, integrity and HR leadership at Core Molding. And she has positively impacted the customers and communities that we serve. Renee and the HR team are a critical component of our success and our overall business strategy. Having an open, engaging and rewarding work environment is foundational to any business strategy. And we're fortunate that Renee is a part of our leadership team, and she is an asset to the organization.
I would like to start with some very recent good news. Last week, we came to an agreement with Volvo to extend our current supply agreement through 2027. With this extension, we were able to modify terms that provide the company with a recovery of raw material costs. This agreement also provides our valuable partner with uninterrupted service for more than five years. We're excited to continue our relationship with Volvo.
Last quarter, John and I spoke to you about our IR strategy that we implemented earlier this year and described how we have prioritized a proactive investor outreach process. We are pleased with the reaction from the buy side and sell side on our journey to increase awareness of the Core Molding story. We continue to believe that our stock is underfollowed, and we are continually working to create transparency and awareness of our company.
Now turning to our continued progress. I will open up by discussing our major initiatives and touch on some highlights in our 2022 second quarter results. Then I'll turn the call over to John to review Q2 in more detail. Lastly, I will come back to wrap up the call and discuss our continued efforts around the company's sustainability programs and provide some market outlook.
Historically, Core Molding was synonymous with the heavy truck OEM industry. In 1996, we acquired Columbus Plastics, which was a division of Navistar International. So it was natural for legacy stakeholders to think of us as a truck company, citing that more than 90% of our revenue is originated from the heavy-duty transportation industry.
However, in 2015, we began transforming the business through strategic acquisitions that added thermoplastic presses and specialized material compositions. Then in 2019, we underwent a major company-wide operational turnaround project.
Most recently, in 2020, we introduced two important teams, our technical solution sales team and our materials R&D to create engineering materials that support customers by solving challenges and creating new products. Instead of referring to ourselves as a composite company, we began building an innovative business around engineered materials. This deliberate sequence that includes our turnaround program, transformational and diversification plans, coupled with the launch of the technical solution sales and material R&D teams over the past several years, brings us to 2022. And today, our medium and heavy-duty truck business represents 39% of our product revenues, well below the 90% of truck business from just a few years back.
We did not deliberately reduce our truck revenues. Instead, we strategically grew into other industries and businesses by partnering with customers and developing new specially formulated engineered products that are either a unique solution or much improved conversion from traditional materials like concrete or metal.
In many cases, we take multiple components and redesigned them into a single molded piece that is lighter weight, stronger, corrosive-resistant and requires less labor during assembly for the customer. We are skilled at providing the upfront work, including design, development simulation, which enables customers to create unique products and solutions that by their basic design perform better and last longer.
The outcome is an infinite market for product improvements, especially important now when costs are rising in businesses as well as the public sector need better margins and simpler supply chains. This differentiation opens up new markets and creates new demand, which is what we are experiencing with the continued momentum in our business.
Profitable growth and diversification will continue to be the cornerstone of our business model and long-term strategy. And in the first half of 2022, we have successfully added $16 million of net new wins. These net new wins will launch between 2022 and 2024 and are incremental to the $75 million of wins we achieved last year.
This incremental business further diversifies the company's revenues by expanding into growing markets like last-mile delivery transportation, utilities, construction, agricultural and power sports. A number of our current customer partners are seeing the strength of our model and are engaging us to partner with them on the other products, thereby increasing our wallet share. Personal watercrafts and all-terrain vehicles are a great example of this.
We have significant market share in the personal watercraft industry, but some of these companies also sell golf carts, all-terrain vehicles or light utility vehicles. And we are partnering with those teams to look at other engineered material applications. We believe this larger category of utility and sport vehicles provide additional tailwinds related to our power sports category. This is just one example of our significant wallet share expansion possibilities.
Coming off of back-to-back record revenue quarters, we are encouraged by business demand for 2022 and 2023. The demand environment allows us to be more selective about the new business that we accept. We will continue to look for ways to diversify revenues and produce high-value products, generating better margins.
We are ramping up major programs with certain customers and have full production launch in Q3 of the Ford Bronco roof in our automotive category. Launches of major programs, along with serving production requirements of existing commitments, requires proven processes, adequate capacity and a dedicated team in each of the plants.
Bringing all these new products to life requires stable, reliable systems that are capable of handling changes in customer demand while delivering operational improvements. We are working daily on all of this.
New business wins continue to be our primary growth driver. Our current opportunity pipeline continues to be robust at over $115 million. If you remember from last time, this was significantly higher, but the pipeline is lower than reported in the first quarter as we rationalized opportunities based on capacity constraints and eliminated lower value-add opportunities and projects that require capacity sooner than what we can deliver.
We are now to a point that in order to continue our revenue expansion, we are increasing capacity with the installation of three new presses and automation in our existing facilities. We first want to maximize capacity within our existing six plants before adding another location.
Turning now to a few of our financial highlights. On top of our highest quarterly sales reported for Core Molding last quarter, we topped the number for the second quarter with over $98 million in revenue. In Q2, we continued to focus on offsetting raw material and other manufacturing cost inflation and are always looking for ways to improve efficiencies in our plants.
In the second quarter, we saw some inefficiencies driven by high customer demand and disruption in order fulfillment due to customer supply chain challenges. We are actively working with our customers to manage demand and improve our production efficiencies.
Our material and labor supply pressures have stabilized but are still a challenge at times. So we are monitoring this carefully. The important takeaway is that the demand environment continues to be strong.
With that, I will turn the call over to John to give further details on our overall financial results.
Thank you, Dave, and good morning, everyone. Second quarter 2022 net sales totaled $98.7 million, up 23% versus a year ago, and product sales increased 18% versus the prior year period. Revenue increases were largely driven by higher customer demand across nearly all industries, new program launches as well as raw material recoveries.
Gross profit for the second quarter was $13 million or 13.2% of sales compared to $13.7 million or 17.1% of sales in the prior year quarter. The decline in second quarter margin percentage was primarily due to product mix shift in the quarter, coupled with the impact of raw material recoveries as well as production, inflation pressures and high demand related to plant inefficiencies that we are working to improve.
Excluding the raw material recoveries, second quarter 2022 gross margin would have been 14.3%. We have recovered a majority of the increased costs the company incurred from raw material inflation. And as Dave previously mentioned, we have come to an arrangement with Volvo on a new long-term agreement that allows us to begin recovering raw material cost increases beginning in July of this year.
As Dave mentioned, supply chain stability has returned. However, certain resins, chemical and hardware component prices continue to increase. We will continue to pass through changing raw material costs where we can going forward.
Finally, we are carefully watching for customer demand changes, which we could see in the second half of 2022 or early 2023 if recessionary pressures increase.
Selling, general and administration expenses for the quarter were $8.7 million compared to $7.6 million in the prior year period. Although SG&A dollars increased primarily due to labor, insurance and professional fees in the quarter, as a percent of sales, SG&A for the quarter was 8.8%, which is an improvement of 60 basis points versus a year ago.
In the second quarter, the company reported operating income of $4.4 million. Q2 net income aggregated $2.2 million or $0.26 per share compared to 2021 second quarter net income of $4.1 million or $0.48 per share. Adjusted EBITDA for the quarter was $7.9 million or 8%, a strong second quarter notwithstanding the comparison to $9.7 million in the prior year quarter. You can find the GAAP to non-GAAP reconciliation of adjusted EBITDA financial measures at the end of this press release.
As we discussed in our last call, our strategic revenue diversification plan continues to make progress with product revenue for the second quarter consisting of 39% truck, 23% power sports, 16% building products, 9% industrials and utilities and 13% other.
Now turning to the first half results. Net sales for the first six months totaled $189.3 million, up 24% from a year ago, and product sales increased 24% versus the prior year period. Sales increases were largely driven by customer demand across all industries, new program sales as well as raw material recoveries.
First half gross profit was $27.6 million or 14.6% of sales compared to $26.5 million or 17.3% of sales in the prior year first half. Consistent with the second quarter, the decline in the first half margin percentage was primarily due to a mix shift, zero margin raw material cost recoveries and other production inflationary pressures and operational efficiencies. Excluding the raw material recoveries, the first six months gross margin would have been 16%.
SG&A expenses for the first half were $17.2 million compared to $14.9 million in the prior year period. Operating income for the first 6 months was $10.4 million. Fiscal 2022 first half net income aggregated $6.1 million or $0.71 share compared to net income of $7.5 million or $0.89 per share in the prior year.
First half adjusted EBITDA was $17.5 million or 9.2% compared to $18.2 million for the prior year. You can find the GAAP to non-GAAP reconciliations of adjusted EBITDA financial measures at the end of today's press release.
Turning now to the company's financial position, cash flow and balance sheet. The company's cash provided by operating activity totaled $2.9 million for the first six months ended June 30, 2022, and capital expenditures for the same period were $8.6 million. The increase in working capital due to the growth of the business has reduced our cash flows from operations. Approximately $5.2 million of the year-to-date capital expenditures related to capacity increases or the launch of new programs.
On the last call, we talked about revising our capital spending in 2022 to approximately $20 million, inclusive of capital to complete the capacity expansion of our direct long fiber thermoplastic expansion or D-LFT in the Mexico plant. All of the equipment for the new press is now in place, and we anticipate the new press to be at full operational capacity in Q3.
As we discussed last quarter, adding more presses and automation will allow us to maximize our current footprint and add needed capacity, which is revenue-generating immediately and helps drive higher throughput and efficiencies while reducing our reliance on labor.
At June 30, 2022, the company had available liquidity of $18.4 million primarily under our revolving credit facility. The company had term debt of $23.2 million at the end of June, and our term debt to trailing 12-month EBITDA ratio was less than 1x adjusted EBITDA at quarter end.
The company's working capital remains strong. And we ended the quarter -- ended the June quarter with accounts receivable at $54 million and days sales outstanding or DSO at 49 days.
Our return on capital employed, which is a pretax return metric, for the first half of the year was 15.2% on an annualized basis. We continue to believe that our strong balance sheet, coupled with efficient liquidity, provides the company with the flexibility to continue to grow.
Subsequent to the end of the quarter, on July 22, the company refinanced its debt facility and entered into a new aggregate $75 million credit agreement, evenly split between a revolving loan, term loan and CapEx loan. Concurrent with the closing of this credit agreement, the company entered into interest rate swap agreement through 2027 on the $25 million term loan, paying a fixed rate of 4.75%. We used proceeds from the new term loan to repay our higher rate existing term debt.
Although we successfully completed our business transformation from a few years back, the work is never done. We are continuing to improve operational efficiencies on the production floor across all our plants, and the addition of more presses in our existing facilities allows us to extend throughput and drive incremental revenue. We are committed to core strategic growth prospects and profitability goals and for this year and look forward to driving more shareholder value through sales growth, better performance and clear consistent messaging with investors and analysts.
With that, I'd like to -- I would like to turn it back to Dave for some final comments. Dave?
Thank you, John. We're happy to report record quarterly sales and continue to see strong demand for truck and power sports with growing demand in industrials, utilities and packaging. We are focused on margin improvement, better efficiencies and making the most of our added presses and automation.
Although we cannot control product mix from quarter-to-quarter, we can control our productivity and operational efficiencies in each of our 6 plants. With a solid demand environment at core and record-setting sales, we must relentlessly drive productivity improvements, focus on eliminating all waste and increasing throughput. This is hard work, and we have the right team and processes to execute.
Regarding sustainability in Core Molding, our long-term goal is to positively impact the world with smarter alternative materials that reduce the environmental impact. Related to this, we are purposefully working to convert waste into usable products and on deploying recycled materials as alternative to prime materials.
As I mentioned last quarter, we took seriously our responsibility for environmental sustainability that focuses on the efficient use of energy and raw materials as well as waste minimization. Our materials development team is continuously researching alternative materials that reduce environmental impact.
Our sustainability efforts extend into our customers' businesses with the design of engineered materials and processes that convert existing materials and provide solutions for our customers that also benefit our communities. For example, in our packaging category, we have partnered in the design and now manufacturing unique containers for our customer to grow and harvest millions of crickets. And this is in a fully automated facility to serve as protein-rich food for countries that are underserved or as a base for animal food.
This type of innovative sustainability solution is one example of how Core is making a difference in the world. The applications are truly limitless. We remain intensely focused on executing our short- and long-term plans. And we are well positioned to grow and generate profits and cash flows.
We are winning in new industries, investing in our people, engineering capabilities, automation and assets. We are relentlessly driving improvements in our business every day. Our investments in innovation and product conversion result in lighter weight, lower cost and higher performance products for our customers.
Utilizing our heat map hotspot process, we are discovering new applications and expanding wallet share, especially in the industrial and utility sectors. We are solving challenges for businesses and people that desire to what we call work where they want to live, which is driving more infrastructure demand.
We are partnering with businesses that are solving new and evolving infrastructure challenges such as underground high-speed data lines that accelerated throughout the pandemic and continues today. We believe that a relentless execution of our strategy will pay off by leading to further stability and profitability for our company.
We continue to see a bright future for Core Molding Technologies. And I'm very excited to continue to expand the business and deliver value for our shareholders and for all stakeholders.
With that, I would like to open the call to questions from analysts or investors. Operator?
[Operator Instructions] The first question comes from Chip Moore with EF Hutton.
I want to ask about, I guess, first on just production and efficiencies. You called that out. It sounds like it's more customer-driven on supply chain and some of those issues. So maybe just if you could expand on that and what you're seeing there and what you can do to help mitigate some of those pressures?
Yes. So on the product mix and really product mix and operational inefficiencies, it obviously impacted our gross margin by about 340 basis points. We really see a ramp-up in the truck schedule. So on the roof products, roofs are significantly more complicated, some of the other products, and it drives a lot of mold changes and I guess, overall from the product mix.
So we've implemented a lot of Kanban systems and really [indiscernible] systems, quick change of molds and dyes to really compensate for the product mix side. Obviously also had to add certain labor into specific plants as to handle the increase in the demand. So we do see a big increase in truck.
Got it. Okay. That's very helpful. And if we think about that, some of those efforts, if we think about Volvo obviously layering in starting Q3 on that new extension with price pass-through if you take that and just some of the ramping programs, is there a way to think about any read-through for margins in the back half? I would assume improving sequentially, but just curious how we should think about that.
Yes. Obviously, the Volvo contract starting July 1 will help us going forward with -- on margins. We really haven't been able to recover in the past one of those areas or with those guys. We've been working with them to negotiate a new deal and working actively with them. And we appreciate them kind of working with us on that. So we would expect to have some improvement in margins as a result of that.
At the same time, I think, as Dave mentioned, we're going to work through some of the operational challenges at the same time, get to the Kanban processes put in place, the change in the molds put in place and then work through the new labor as the volumes come in at certain plants. We have to bring in labor, and we'll work through the training and the retention of the people. And so I think with the operational improvements we make and the Volvo, we would hope that, that would drive margins back up going into the back half of the year.
Got it. Okay. That's helpful. And maybe one more for me. I guess just bigger picture, right? You're sort of bumping up against practical capacity, obviously investing in new capacity. How do you think about -- you talked about it a few times in the call, think about sort of potential future growth and sort of balancing any recession risk in the future? Or conversely, are you sort of having the luxury to be more selective on some of the business you go after is -- do you think that's more important, focused on maximizing what you have versus when would you think about sort of stepping out more on the growth side?
Yes. I think right now, it's really about being able to put the capacity in place in areas that we have locations and the facilities in place in those plants to really optimize those plants. And in doing that, we have some areas that are probably bumping up against the capacity limit, which is why we took some of the opportunities out of our pipeline and also really rationalizing the pipeline on where do we add the most value.
So it's a lot more -- being a lot more selective right now. We have a couple of locations left in some of our plants to continue expanding further. And that would require either addition of a new facility or an acquisition that was in a similar industry.
Yes. Got it. Okay.
We still have some opportunities in our current plants when we start talking about the automation we're putting in place. Really the automation, it is reduced -- it reduces your labor. It also reduces your exposure to the labor market. But more importantly, what it does is it provides a faster cycle time for your machines because you're not waiting for people to go in and out of a machine to unload or load the part. So you can run the machines faster with the automated load and unload.
Yes. Perfect. Okay. So kind of tackle some of that low-hanging fruit and if the demand grows and the wallet share grows and contemplate additional expansion when it mix up. Okay.
The next question comes from [Matt McGuire] with [DemCo].
So kind of a follow-up question here. But as we think about your kind of aggregate book of business, what portion of that business needs to be, I guess, renegotiated or repriced to at least cover cost inflation? Have you got through the majority of those contracts? Or is there more to come? And what are your expectations as we move into the second half of this year?
Yes, you're right, we have actually gotten through all the contracts, all the significant contracts at this point. There was kind of a 2-step process. The first step was to introduce a raw material adjusted clause in some of these contracts. And then after that is going on quarter by quarter and being able basically pass those costs through every quarter. And so we put mechanisms in place for most of those new contracts that we put in -- that we've renegotiated at this point. We do have ongoing a couple of other contracts that aren't due yet, but we've been able to get raw material recoveries from them. And so the contracts don't specifically provide for them, but both of the customers are providing us with raw material recoveries at this point.
Okay. Great. And then I think you talked a little bit about it at the beginning of the call, but the $16 million in new business wins year-to-date, maybe remind us what types of new business is that from maybe a verticals perspective? And then that's down a little bit from last year, I guess, the pace of new wins. But how are we thinking about maybe the next 12 months in terms of what's in the pipeline for additional new wins?
Yes. So I'll just kind of go through as far as the current wins. About half of it is in what we would call utilities. And then the other half is split between what we would call last-mile delivery truck, so not heavy trucks, but your Amazon-type trucks and FedEx-type trucks. And then some of the remainder is in smaller programs on ConAg and power sports. And as we see the net new wins moving forward, I know our EVP of Sales and Marketing, we had set some targets. But when we start looking at the capacity and ability to launch, we're launching $75 million of wins last year. We got another $16 million in wins this year.
We're adding really, in total, four new presses, one, the D-LFT press that John talked about in Matamoros, which is a 5,500-ton press. And then we're adding another DLT press in Winona and two more presses into our Cobourg facility. So getting those presses up and launch and the automation in place will take a lot of resources and time over the next about six months.
So being able to add capacity, we're being a lot more selective on what we're adding and working on the current contracts and adding the automation. I would not expect to see $75 million again this year. I don't know that we would have the capacity to not only launch it but also to produce it.
Okay. And then what -- how should we think about start-up costs as you're launching on $75 million of new wins looking ahead?
Yes. They obviously -- in the first quarter that you bring someone up, there's the ramp-up stage, where you're tuned in into tools, you're getting up to speed on throughput, those types of things. And so we do -- each quarter, we're going to see a little bit of cost, additional costs related to any ramp-up that we do on the new products. But for the most part, we've kind of gotten to a point where we really know how to do this, but it does probably have a little bit of an impact as we bring it up each quarter. But long term, obviously, good news of bringing a new program up and then getting it up to speed and getting the margins up to the program levels that we have bidded on.
The next question comes from Jeff Geygan with Global Value Investment Corporation.
Appreciate the color and detail in your prepared comments earlier. Dave, with respect to your comment around infinite market opportunity, as you think about narrowing to a more manageable universe, what are the criteria that you consider most important when think -- targeting new business?
Yes. I think for us, it's what we find most appealing is when we can come in and offer something that's significantly different than what they currently have. And what I mean by that is, especially when we deal with, say, industrial or utilities. They might be using concrete troughs or concrete drains or storm water drains and things like that to where you're able to come in and offer a product that offers a better performance because maybe it's more surface area or it's easier to put in place and be able to make that a configurable product to where they can satisfy the entire demand for it.
And we see that with -- we talk about troughs is making the different [indiscernible] sections of the trough as well as being able to build to an order. So if they outline an entire project, and we can take that and configure that and turn it into a -- almost like a Lego piece to where we're able to make all the products for it and ship it to the location, and then it just gets installed. So really, where we can offer a competitive advantage with our process and our material to what they're currently using.
What type of overlay do you have financially when contemplating these different opportunities?
What type of?
For example, yes, maybe it's a question for John. Just as you think about an engineering solution from this large universe, what are the financial criteria that you would apply to a good or better type of customer?
Yes. So Jeff, one of the things for all of our business that we look at is we kind of look at the margin, and we look at the return on capital employed from both situations. And so when we're looking at any new program, if we're adding value, we do really -- we kind of set targets for the margins we want for the value adding. And then what we're looking at also is that it's going to take normal capital, and when I say normal capital items that we use every day in the business, we have a hurdle rate that we look at. And if there's a kind of special asset that we would have to buy for any type of product, we might have a different hurdle rate. We have a different hurdle rate.
Just knowing that you really are getting all your income from that maybe that specific asset from that specific target opportunity. And so we do, though, always look at both the return on capital employed, and we've kind of put that out there that we're trying to earn at least a 16% return on capital employed long-term.
And again, that's pretax. And then again, we set the earnings target to try to get to that, which will then drive the free cash flows that we need to continue to grow the business.
Yes. Great. Appreciate that additional color. And Dave, back to you strategically with the finite amount of capacity in the six facilities that you have, under what circumstance would you opt to add a seventh as opposed to rationalize further to improve profitability among your six facilities?
Yes. I mean, right now, I would absolutely say that we're looking at the rationalizing the new business coming in as well as optimizing what we have in our current locations. That will take some time.
We have some launches that we have to get under our belt here and put the horses in place to make sure that those are successful, as John has said. What we would look, I think we're probably talking six months, nine months to be able to do that. And we have one or two locations left in our current facilities to add. But I think it's more about the automation and optimization and then really longer term, what we look at, whether we would add a new facility. But we would have to have that business really already secured before we would just add a facility and just decide that if we build it, they will come because we know that doesn't work.
And Jeff, I think right now, we realize that we're in a little bit of an uncertain time in the economy. And so as we went through this year, last year, we put in $75 million of new wins. This year, we've been more rationalizing the business. I think it's more driven by let's see where the economy goes. And then as the economy does what it does, I think it will come out on the other side of ventures like it always does and also start growing again.
And we would probably look at, hey, is this the time that you look at investing in new buildings and new facilities where you've got a good long-term growth path on the economy going ahead of you. Right now, we're just a little bit uncertain.
If we could pick exactly where we think this thing is going, we would probably go one way or the other. But we're just going to be a little bit cautious right now and see where this economy goes over probably the next 12 months and then maybe kind of look at things a little bit different as we get on the other side of what's happening over the next 12 months.
We certainly understand the uncertainty. John, last question here. It's really just a housekeeping issue. Your income tax expense year-over-year is notably higher. Did you explain -- or can you explain the basis for that?
Yes. So right now, as we kind of -- as we were going through these renegotiations with our contracts and trying to get all the raw material recovery depending on what country we are in and where we were getting the raw material recoveries, we -- over the last year, we've been generating losses in the United States.
We do put it in our footnote 10 or 11 in the income tax, but -- so we're generating losses in the United States. The other situation is a lot of our SG&A is in the United States being the corporate offices are here.
We actively have a program where we do allocate costs to the Mexico and Canadian entities, but there is a limit on what you can do. And so what's happened is that the income in Mexico and Canada is getting taxed and put on my P&L.
The losses in the United States because of accounting rules aren't allowed to be recognized on the P&L right now. We have to put a full valuation allowance. So you really kind of have the tax on the two profitable and not the benefit from the unprofitable.
So long term, we're addressing that by we're kind of looking at the way we have some of our business structure and maybe not just doing cost allocations but looking at royalty situations or where really a lot of the value from what we do in Canada and Mexico is being driven out of the United States and that we maybe restructure a little bit and get a little bit more income into the United States and maybe kind of look at that.
We do have an NOL right now on the books, that NOL not recognized of around $4 million. So to me, that's cash out there that we could go get if we can figure out this problem and use it.
And so it does have a short-term, hopefully, short-term impact on the P&L. But long-term, we're hoping to get back to where United States is profitable, and you'll get kind of more of a standard, probably 25% tax rate blended or so.
Yes. I'll conclude just by congratulating both of you. I think your performance has been notable and delivering another constructive quarter. Good luck.
The next question comes from Justyn Putnam with Talanta Investment Group.
I just have one quick clarification question. In the press release, it said that your gross margin percentage pressures were primarily due to mix shift, production efficiencies and inflation. I think earlier caller asked about that, and you mentioned 340 basis point impact, and it was across those three items. Is that correct?
Yes. I think kind of Dave was throwing across all three items there that we have. When we kind of look at -- I think the 10-Q that will come out today gives you a little bit more of a clarity on the exact numbers that you'll get for the three components, and I'm actually just pulling it up here. Before adjusting for the raw material recoveries, you're going to end up with about, yes, 340 basis points from selling price and raw material costs, unfavorable net change in selling -- or inefficiencies, I'm sorry. And then the selling cost is 160 basis points selling cost of raw materials. And then we did pick up some benefit from leverage of about 110 basis points on fixed cost leverage. So yes, that 340 is across all three categories.
I'm sorry. Go ahead.
And that's comparing quarter-over-quarter, right? Second quarter '21.
Compared to last year -- yes, to last year second quarter.
So is there a way to quantify how much you think is -- it's somewhat implying that this is kind of unusual or a negative impact. Is that a correct interpretation of that number, too? Do you feel like that's a negative impact for that quarter?
Yes. I would think it's a negative impact for the quarter also. I mean, when we're really looking at the ramp-up that's going on right now with the type of product that we're ramping up being heavily truck, just takes a lot more labor when you ramp that up. You get a lot more training costs, those types of things. It's coming in, and so I would even -- if you're looking at kind of sequential or you're looking at it year-over-year, I think you're going to see a little bit of the same event happening where we're going through some of the inefficiencies of the types of products we're producing and the speed that we're having to produce it along with a little bit of the ongoing interruptions from the customer supply chain.
It's one of those things I can't overemphasize enough. I mean, we're still seeing customers call us on a Friday and say, hey, we can't run next week. And we're scrambling like anything to take people out and kind of rearrange the schedules, rearrange the fiberglass we're actually going to produce and where we're going to send that and tell the customers, say, we can produce your product. So we're still seeing a lot of that disruption, and we saw a lot of it in the second quarter. And that's where we're really just trying to work with our customers to get a little bit more stable than what we maybe ran in the first quarter or again last year at the same time period.
You start seeing a product mix change quite a bit with the truck ramp-up as well. Truck is saying they're booked for the next 18 months.
Right. Right. Yes, the past few quarters, particularly at the end of 2021, you had broken out one particular dynamic that was impacting you. I think you used the term it's, what is it, unrecouped raw material price increases. That's -- has that pretty much worked its way through, and where that's not a significant impact as these other items you just mentioned?
Yes. In the fourth quarter, we were really pretty far behind on getting a lot of the customers. A lot of the customers at that time had never heard of what the price increase. We were battling them on price increases. We have really gotten to the point where we've got recoveries from all our customers. Starting in July, we got kind of that final contract done with Volvo. And so it's become much less of an issue.
The bigger issue we probably have now, and that's what we've been breaking out that becomes something that as we go forward, we -- it should normalize is that on the raw material recoveries, we're really not getting a profit on those, and so we pass that cost through. And it's actually having a little bit of a dilution to our gross margin percent, not the gross margin dollars because we're really selling materials at cost is what we're doing whenever we have to raise cost because of raw material or raise price because of raw materials.
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
No. Thank you for your continued interest in our company. We look forward to providing an update of our progress when we report the third quarter results in a few months. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.