Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Myers Industries Q3, 2019 earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session. Just a question. During the session you will need to press star one on your telephone.
Please be advised us to this conference is being recorded if you require any further assistance. Please press star Zero I will now like to surrender conference over to your speaker today Monica Vinay. Please go ahead.
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Welcome to Myers Industries third quarter 2019 earnings call I'm, Monica Vinay, Vice President of Investor Relations and Treasurer Myers industries.
Joining me today, our Andrey important interim President and Chief Executive Officer, and Kevin Brackman, Executive Vice President and Chief Financial Officer.
Also joining us on the call today in available to answer questions are Mike Valentino group, President material handling segment, and Chris Dipal Group President distribution segment.
Earlier. This morning, we issued a news release outline the financial results for the third quarter 2019, if you've not yet received a copy the release you can access it on our website at Www Dot Myers industries dotcom under the Investor Relations tab.
This call is also being webcast on our website and will be archived there along with the transcript of the call. Shortly after this event.
Before I turn the call over to Andrea and Kevin I would like to remind you that we may make some forward looking statements. During the course of this call. These comments are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995, such statements are based on management's current expectations and involve risks uncertainties and other factors, which make.
Cause results to differ materially from those expressed or implied in these statements.
Further information concerning these risks uncertainties and other factors set forth in the company's periodic SEC filings and maybe found in the company's 10-K filings.
I'm now pleased to turn the call over to Andrey important.
Thanks, Monika good morning, everyone and thank you for joining a.
I'm pleased to be speaking with you today at the company's interim president and CEO .
Before we review the results for the third quarter and our outlook, Let me say a few words about the CEO transition I.
I first want to thank Dave Spaniard on behalf of the board of directors for his leadership of Myers over the past four years.
Dave was instrumental in my joining Myers and his dedication to the company and our people will have a lasting impact.
The Myers Board of Directors has commenced the search process to identify a permanent CEO to lead the company any interim I appreciate the boards confidence in me and I'm excited to work closely with our senior leadership team.
I want to emphasize a few key points that should give investors confidence.
First and foremost it is my responsibility as interim CEO to ensure that our strategic operational and financial priorities are clearly understood and executed, especially during this time of transition and I can assure you that our entire executive leadership team is committed to executing on these priorities. This.
The current market headwinds, we remain focused on serving our end markets controlling our costs executing our key initiatives and we are ready to capitalize on opportunities that may arise along the way in short your company isn't capable hands.
With that introduction, let's get to the review of our third quarter results.
Generally speaking we continue to see softness in several of our key end markets, particularly in the material handling segment.
Bite. These demand headwinds we were pleased to generate I saw that 10% increase in distribution segment revenues and our overall focused on price cost optimization across the portfolio boosted gross profit margin and we drove nearly 8% increase in year over year adjusted operating income.
If you turn to slide three of the presentation, we'll share an overview of the accomplishment and challenges we saw in the third quarter.
Let's begin with a high level review of our achievement.
In August we completed the acquisition of coffee manufacturing.
A copy aligns well with our overall growth strategy and extends Myers tire supplies leadership position and the commercial fleet market.
As you'll see in our resolve the acquisition contributed nicely to the growth we saw in our distribution segment during the quarter.
In addition to integrating tuffy during the quarter. Our distribution segment also continued to execute on its transformation plan.
Excluding the impact of Toughie sales increased for the fourth consecutive quarter and adjusted EBITDA margin increased 190 basis points to 9.5%.
We continue to be on track to meeting our distribution segment EBITDA margin goal of 10% by the end of 2020.
On a consolidated basis adjusted operating income increased by almost 8%. Despite a decline in net sales of 7% during the quarter.
The organization continues to drive continuous improvement processes and cost discipline throughout our operations. We are pleased with the progress we seen to date.
We generated 22 million of free cash flow during the quarter, which puts our year to date cash flow as a percent of sales in line with the prior year at closer to our target of greater than 9%.
Now, let's review some of the challenges we had during the quarter.
And our material handling segment recorded a charge of 3.5 million for estimated product replacement cost related to a manufacturing defect identified during the current current quarter in an isolated number of legacy boxes.
Once the issue was identified the immediately performed root cause analysis and implemented corrective action.
Additionally, we have worked closely with the impacted customer through collaboration and transparency to ensure a high level of satisfaction has achieved and the issue is fully remediated.
Moving on key end markets and material handling continue to experience several challenges during the quarter.
And our food and beverage end market sales declined year over year, primarily as a result of lower see box sales.
We believe this is due in part to the late planting season, and the farm sector and limited Capex spending following some customer consolidation within the market.
Kevin will address this later along with trends for the upcoming axes. It.
And our industrial end market sales were down due to softer than anticipated orders from a few of our larger customers for some of our military packaging products.
Because the business its project based it's difficult to accurately forecast when demand for those products will pick up.
At this point, we aren't expecting to recover that volume in the fourth quarter.
Although we did realize incremental fuel can sales volume in our consumer end market during the quarter as a result of hurricane Dorian It was not enough to offset the soft demand that continues from the first half of the year as a result, the unprecedented wet weather during the start of the lawn and garden season.
Finally sales to RV customers continue to decline, which was not unexpected as we've mentioned before during the softer demand period and the RV market, we're taking steps to consolidate our manufacturing operation.
We estimate that this consolidation project will be completed in 2020, what's an expected annual savings run rate of 1.5 million beginning next year.
Our focus on gaining market share with our current customers and pursuing new customers has resulted in some wins over the last few quarters.
Overall the quarter reflected the continued success of the distribution segments transformation and the margin benefit of our focus on price cost optimization.
Now I will turn it over to Kevin to go through a financial review of the corridor.
Thanks, Andrew in and good morning, everyone. Today, I'll review, our 2019 third quarter financial performance, including our balance sheet cash flow.
Please turn to slide for their presentation and I'll begin with a review of our third quarter operating performance all numbers in the presentation reflect continuing operations net sales for the third quarter were 125 million a decrease of 7% compared to the third quarter of 18. The decrease was primarily due to.
The decline in that material handling segment within the company's food and beverage and industrial end markets.
Adjusted gross profit margin increased 20 basis points to 31.5%.
This was primarily due to favorable price cost margin, which more than offset the lower sales volume and the charge. We took during the quarter for estimated product replacement costs that and train discussed earlier.
Our adjusted operating income increased 8% 8.5 million for the quarter. This was the result of the higher gross profit margin as well as a decrease in adjusted SGN a year over year, due primarily to lower variable compensation costs and savings from the distribution segments transformation initiatives.
Adjusted diluted earnings per share were 15 cents were flat compared to the third quarter of 18 GAAP earnings per share were 15 cents compared to a loss of 60 cents for the third quarter of last year GAAP earnings per share in the third quarter of 18 included 33 million of charges that we took relate.
It is the 2015 sales the lawn and garden business.
Now, let's turn to slide five for an overview of our performance by business segment.
Net sales sales in the material handling segment decreased 14% $84 million. The decline was driven by sales decreases across all of this segment's end markets. The sales decreases by end market. It were highlighted earlier in the presentation by Andrea and our outlined here as well.
Despite the lower sales material handling its adjusted EBITDA margin increased 90 basis points to 18.4%, which was primarily due to favorable price cost margin and lower incentive compensation costs.
In distribution net sales increased 10% of $41 million, excluding the Tuffy acquisition, which contributed 2.4 million in sales during the quarter net sales increased 4%.
Distributions adjusted EBITDA margin increased 190 basis points to 9.5% as a result of the higher sales volume savings from the segments transformation initiatives and the tough. He acquisition. This segment continues to execute its transformation plan, which includes enhancements and its go to market.
This strategy the implementation of 80, 22 would drive improved contribution margins and optimization of its logistics and overhead costs with a goal to expand the EBITDA margin to 10% by the end of 2020.
Turning to slide six we generated free cash flow 22 million in the quarter compared to 12.7 million for the third quarter of 2018.
Higher cash flow was mainly due to a decrease in working capital year over year, which was primarily the result of lower accounts receivable due to the softer sales volume and a reduction in past due account.
Working capital as a percent of sales at the end of the third quarter was 4.7%, which was in line with previous quarters.
Now, let's turn to slide seven for 2019 outlook for our end markets as Andrea and outlined earlier several of our key end markets are challenged at the moment and we saw the results of that in the third quarter. This trend is expected to continue into the fourth quarter. As a result, we now anticipate that sales for 2019.
We'll be down high single digits versus our previous estimate of down low to mid single digits I'll go into some detail now on the drivers behind that.
Starting at the top with our consumer end market. We continue to expect that for the full year. This market will be down high single digits as we had anticipated the softer market demand that we saw in the second quarter continued into the third quarter.
Additionally, because we launched the new fuel container late last year, we don't anticipate the same level of sales volume during the fourth quarter of this year given that the fourth quarter is traditionally a softer quarter for fuel container sales as a result, we've forecasted sales to be down in this market during the fourth quarter.
In our food and beverage end market, we are lowering our outlook. We now anticipate that this market will be down double digits for the full year compared to our previous outlook of down mid teens as we stated earlier a portion of the decline came during the first quarter of this year as there was a difficult year over year.
Comparison due to a very high season in early 2018.
Additionally, there has been a high degree of uncertainty across the AG sector, while that uncertainty has continued into the fourth quarter. We've had a indication from some of our customers that demand for the fourth quarter will be softer than previously expected. While we do anticipate continued success in the food processing portion of our business.
Our volumes in that market coupled with the growth. We are experiencing are not yet large enough to offset the overall impact of the AG portion of this end market.
Turning to our vehicle and market, we continue to expect to be down high single digits, primarily driven by the decline in sales to our be customers that has been ongoing throughout the year.
In our industrial end market, we've updated our outlook from up low single digits, two down low single digits to reflect the sales to decline we experienced during the third quarter as a result of softer than expected demand for millet military packaging products the pace of business with our industrial distributors.
Remained steady to slightly down.
Finally in our auto aftermarket we've updated our outlook from up low to mid single digits two up mid single digits. As a result of incorporating the incremental sales we anticipate from the Tuffy acquisition.
Turning to slide eight I'd like to review our updated outlook for 2009 annual guide 19 annual guidance. We've already discussed the updated sales outlook. So let's start with DNA and net interest expense, we've lowered our guidance for DNA in net interest expense to 24 million and 4 million respectively.
Versus 25 million and 5 million previously.
No changes were made to the anticipated effective tax rate of 27%.
Diluted share count up 36 million shares or capital expenditures of $10 million.
We are updating our EPS guidance ranges and are now expecting GAAP EPS to be in the range of 65 to 70 cents versus 60 to 72 cents previously.
And adjusted EPS in the range of 75 to 80 cents versus 75 to 85 cents previously.
The updated GAAP and adjusted EPS guidance reflect the decrease sales outlook and the charges for the estimated product replacement costs, partially offset by a decrease in incentive compensation costs. The updated GAAP EPS guidance also reflects the reversal of approximately 2.3 million of stocks.
Certain costs that we expect to recognize in the fourth quarter, resulting from the October departure of the company's CEO .
I'll now turn the call back to Andrea for some closing comments.
Thanks, Kevin.
Before we take question, let me close with this comment.
The inherent cyclicality of some of our businesses will always be a challenge, but one we are working to address we are beginning to see the impact of our segmentation efforts in each of the businesses as we look to drive focus in markets that we've identified a key for longer term growth.
Well it will take us sometime to scale. These market segment. Our early results are having a positive and Pat.
Additionally, the work that our teams have done and continue to do like rationalizing our manufacturing footprint and executing continuous improvement processes will also enable us to perform better than we would have through down cycles and the path.
In summary, we remain focused on executing our strategy and continuing our progress and serving our end markets.
With that we will now open the line to question [noise].
That's a reminder trust. The question you want me to press Star one on your telephone to try a question pressed upon Keith please standby well, we compile the county roster.
Your first question comes on line of Tyler Langton with JP Morgan. Please go ahead.
Good morning, Thanks for taking my questions.
I'm good morning, I just had a.
Just had a question I guess on their feedback sale, because it's Q4 in Q1.
The big seasons, and I know you mentioned.
You know sort of the still from uncertainty, but I'm just wondering how much visibility at this point.
Do you have on those two quarters.
Sure. Good morning, Tyler This is Mike.
We're starting to get some feedback and visibility from our customers I'd say, we've got a better outlook on on the softer demand that we're seeing here in the fourth quarter than we do in the first on what's going to happen in the first and we'll talk about the first quarter outlook and forecast in our next call at this point, but we've got some visibility and it's similar to what Youve.
Seen in the past, where you've heard from us in the past excuse me.
What we're on what we expect to happen in the fourth quarter here around the late planting season and the wetter weather. We also believe that some of the consolidation that's happened.
In the customers in that space as they continue with their integration efforts, which includes looking at their fleets of boxes assessing their inventory levels and looking at their overall product requirements going forward is having some of the impact that we're seeing here.
I guess the last thing I'd say about what we're seeing in that spaces. We have no indications to believed that this is a shift in.
Demand for the products long term, we remain very focused and confident in that space to maintain our leadership position in helping our customers in that area.
Solve problems and delivered to their customers.
Gotcha perfect. Thank you and then I engine I guess I think in your the opening remarks I guess you said you were.
I guess open or you know to capitalize on opportunities does that mean sort of during sort of the CEO search I guess my as would be willing to look at acquisitions or if we kind of think of that is for went on on hold until about new CEO is an ounce.
Thanks, Tyler so we're going to continue to evaluate opportunities in the acquisition area. We're obviously looking for acquisitions that complement our organic growth strategy, we've talked about looking at proprietary acquisitions. So those tend to have a lot.
Our process I mean, you usually don't have an intermediary involved are usually dealing directly with the seller there are times, where year persuading the seller to sell so just overall does take a longer time, but with the guidance of our board during this interim process.
We will continue to look at proprietary acquisition.
Okay. Thanks, that's helpful and eggs, Kevin finally on free cash flow I know this quarter benefited from strong working capital gains after you saw from pressures.
In the first half 20 pots and kind of what to expect for Q4 around that.
Yeah I think.
Obviously, the 22 million of free cash flow for the third quarter is not a sustainable quarterly amount.
Because of the significant reduction in receivables that we had in the third quarter, what I would say, though if you look at our year to date amount.
34 million over over three quarters, So roughly 11 12 million per quarter, I think that is a reasonable amount.
Uh huh.
Free cash flow for us on a quarterly basis.
Great. Thanks, so much.
[noise] again, if you like Tessa question Press Star one on your telephone. Your next question comes from the line of crests enough with Cowen Your line is open.
Good morning, and thanks for taking my question I had a question about the distribution segment EBITDA margins.
Sure we would the coffee acquisition and not have affected the 10% EBITDA margin goal that you guys have a 10%, but 2020 does does keeping that 10% where it is as a target imply any change to the underlying business margins, where my reading too deeply into it.
I think you're probably reading too deeply into it I. So we said the 10% EBITDA margin goal prior to acquiring toughie. So we're sticking with that goal that's still our goal.
However, we are hopeful that that tuffy will be accretive to that margin.
Okay. That's helpful. Thank you, but I could just squeeze in one more question about the dividend.
It's you know, it's a steady dividend, it's something that doesn't golf and get a lot of attention on these calls, but I'm curious about what you guys think your capacity is for for wrapping that up overtime, not necessarily next quarter or or or even the quarter after that but the way the board looks out of the way current management is looking at it how a new CEO might think about it.
Any any thoughts you have in the dividend going forward would be helpful. Thank you.
We.
We review that dividend every quarter with our board and we will continue to do that in the future. What I would say is our our focus for capital deployment in the near term continues to be on the organic growth.
And M&A.
Portions of our strategy.
So thats the focus in the near term and we'll continue to look at the dividend with our board every quarter.
Great. Thanks.
There are no further question at this time I was trying to call back over to the presenters for closing remarks.
Thank you we thank all of you for your interest in Myers industries, and your time and participation today as a reminder, a transcript of this call will be available on our website within approximately 24 hours a replay will be immediately available via webcast or call details can be found on the Myers industries website under the Investor Relations.
Tam.
Thanks, and have a great day.
This concludes today's conference call you may now disconnect.