Q4 2019 Earnings Call
Please be advised of today's conference is being recorded if you're acquiring any further assistance. Please press star zero I know like the Hana conference over to Miss Monica Vinay. Please go ahead.
Thank you good morning, welcome to Myers Industries' fourth quarter and full year 2019 earnings call I'm Monica Vinay, Vice President of Investor Relations and Treasurer at Myers Industries, joining me today, our Andrey in Horton 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 like Valentino group, President material handling and Chris to Paul Group President distribution.
Earlier. This morning, we issued a news release outlining a financial results for the 2019 fourth quarter and full year.
If you've not yet received a copy of the release you can access it on our website at Www Myers industries Dot com.
It's under the Investor Relations tab.
This call is also being webcast on our website and will be archived along with the transcript of the call. Shortly after this event.
Before I turn the call over to Andreani, 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 may 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 FCC filing and may be found in the company's 10-K filings.
I'm now pleased to turn the call over to Andrey anymore.
Thanks, Monika good morning, everyone and thank you for joining us.
If you turn to slide three of the presentation well share an overview of 2019.
Let's begin with a few highlights.
Overall, our efforts toward continuous improvement through our lean initiatives and 80 20 focus resulted in continued margin improvement earnings growth and free cash flow of 37 million in 2019, we achieved these results despite sales being impacted by shifting weather patterns and softer end market demand.
As a result for the full year, we were able to increase our adjusted operating income by 4%, Despite a 9% decline and sale.
The distribution segment continued to execute its transformation plan, increasing sales by 6% for the year or by 2%. If you exclude the benefits from the recent acquisition a puppy manufacturing.
Adjusted EBITDA margin increased 270 basis points to 8%, indicating that the segment is on track to achieving its goal of delivering a 10% EBITDA margin by the end of 2020.
In addition to advancing a transformation efforts the distribution segment continued its integration of coffee, which we acquired in August of last year.
But just four months of results in 2019 tough he has already proven its alignment with our overall growth strategy and had quickly contributed to the segment improved result.
And our material handling segment, we experienced a number of ongoing market headwinds that resulted in a sales decline a 15%.
However, I'm pleased to report that through the teams focused effort. The segment delivered solid margin improvement through price cost optimization and continuous improvement actions, increasing its adjusted EBITDA margin to 21% for the full year.
Now, let's review some of our challenges in 2019.
And our material handling segment, a number of our key in markets where challenge throughout the year.
And our consumer end market the newly launched Scepter style was well received however, as a result of the unprecedented wet weather during the start of the lawn and garden season demand during the first half of the year what's saw.
The weak demand continues throughout 2019.
And our food and beverage end market sales declined year over year, primarily as a result of lower see box sale.
As we previously stated we believe this was due in part to the late planting season in the farm sector and limited Capex spending following some customer consolidations within the market.
Additionally, as we discussed at the beginning of 2019, we had a very difficult comps during the first quarter as a result of his strong seeds season from Q4 2017 to Q1 2018.
Sales to RV customers and our vehicle end market decline as a result of the multiyear correction in the RV market.
As we've mentioned before we are taking steps to consolidate our manufacturing operations that serve the RV market. We estimate that this consolidation project will be substantially completed by the end of 2020 with an expected annual savings run rate of 1.5 million beginning next year.
Finally in our industrial end market sales were down due to overall weaker demand environment.
You may recall that in Q3, we had softer than anticipated orders from some of our military packaging products.
Also we had a large customer order in our acro mills business last year that did not repeat in the fourth quarter of this year.
As we mentioned last quarter, our results were impacted by $3.5 million charge for estimated product replacement.
The charge was related to an isolated number of legacy boxes produced within the material handling segment and there were no additional charges related to this issue during the fourth quarter.
In summary, we faced a number of challenges in 2019, yet our results reflects the success of the distribution segments transformation and our ability to realize margin benefits from focusing on price cost optimization and productivity improvement initiative.
Looking forward to 2020 market recovery and new product launches are expected to expand our reach across our customer base and drive topline growth and several of our end market.
We will also continue to explore new opportunities to deploy our cash towards projects that drive increased value for our shareholders.
Lastly, I'd like to give you an update on our CEO search.
Our board of directors commenced to search during the fourth quarter for permanent CEO.
They are working to conclude the process as quickly as possible with the goal of identifying a candidate by the end of the second quarter.
During this time of transition our teams continue to execute on our strategic operational and financial priorities and we remain focused on meeting our customers' need and generating profitable growth for our shareholders.
Now I will turn it over to Kevin to go through our financial review and provide more detail regarding our 2020 outlook.
Thanks, Andrea and good morning, everyone. Today, I'll review, our 2019 fourth quarter financial performance, including our balance sheet and cash flow.
You can find a summary of our 2019 for your financial performance on slides 10, and 11 in the Appendix also please note that all numbers in the presentation reflect continuing operations. Please turn to slide four.
Net sales for the fourth quarter were 117 million a decrease of 16% compare with the fourth quarter of 18. The increase we saw on the distribution segment sales was more than offset by the sales declines across all markets in the material handling segment.
Adjusted gross profit margin increased 310 basis points to 33.6%. This was primarily due to favorable price cost margin and productivity improvements. Our adjusted operating income decreased 7% of 7 million for the quarter. However, the adjusted operating income margin increased 60 basis.
0.26, 0.1% despite the lower sales volume. 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 and savings from the distribution segments transformation initiatives.
Adjusted diluted earnings per share were 12 cents compared to 13 cents for the fourth quarter of 18.
Now, let's turn to slide five for an overview of our performance by business segment in the fourth quarter.
Net sales in the material handling segment decreased by 26% to 73 million.
Any androgens opening remark she shared the challenges this segment faced in 2019, which we've continued to see in the fourth quarter.
Sales in the food and beverage were down significantly due to lower seed box sales.
The consumer end market was down due to continued soft demand for fuel containers.
We are overall demand environment and difficult comparisons to last year's fourth quarter led to a mid teens decline in the industrial end market and finally, the vehicle end market decline mid teens, primarily as a result of slowing demand from automotive Oems on a positive note sales to RV customers weren't flat during the.
Quarter.
Material handling to adjusted EBITDA margin for the quarter decreased 30 basis points to 19.1%, which was primarily due to the lower sales volume, partially offset by favorable price course margin productivity improvements and lower incentive compensation.
Turning to distribution net sales increased by 12% of 43 million, primarily due to incremental sales from the Tuffy acquisition.
Distributions adjusted EBITDA margin increased 720 basis points to 8.8% as a result of benefits from this segment's transformation initiatives and the Tuffy acquisition as Andrea and stated earlier. This segment is on target to reaches goal to expand EBITDA margin that 10% by the end of 2020.
Turning to slide six I'll review, our balance sheet and cash flow.
For the full year 2019, we generated free cash flow 36.7 million compared with 55.3 million last year. The decrease in cash flow was primarily due to a reduction in accounts payable and accrued liabilities, resulting from lower sales volume and variable compensation accruals. We also increased cash.
Total spending by 5 million compared with last year.
Working capital as a percent of sales have you ended the fourth quarter was 5.6% which was in line with previous quarters.
Now, let's turn to slide seven for our 2020 end market outlook. As we look ahead to 2020, we expect to see both continued challenges in some of our end markets and improvements in several other end markets starting with our consumer end market and we expect to see improved end market demand and as a result.
I expect the for the full year. This market will be up low single digits, we anticipate that demand for fuel containers will be up in 2020, which would be a turnaround from a week spring season in 2019.
We're also optimistic about our food and beverage end market, where we are forecasting sales to be up high single digits for the full year as we anticipate there will be increased demand for see boxes in the upcoming seed season, which as a reminder occurs Q4 2022 Q1 2021.
We also expect continued higher sales to food processing customers. This year as we continue to gain traction in adjacent markets served by that product line.
Even though we do expect some of the headwinds we saw on the AG market in 2019 to continue during the first half of 2020, we expect sales to food and beverage will be up overall for the year.
Turning to our vehicle end market, we mentioned earlier sales to RV customers were flat in the fourth quarter and we anticipate that as a result of improved customer inventory alignment and new product introductions sales to RV customers will increase year over year. However, we expect to see a decrease in sales to automotive OEM.
Due to a weaker global vehicle environment, and fewer new model launches this weaker environment will likely more than offset the higher RV market sales. So as a result, we expect the vehicle market to be down low single digits in 2020.
Our industrial end market, we anticipate that sales will be up low single digits due primarily the growth in E commerce and share gains, resulting from an expanded market coverage and finally in our auto aftermarket.
We are forecasting sales to be up low teens as a result of the continued execution of the segments transformation initiatives and the further integration and contributions from the Tuffy acquisition.
Turning to slide eight you can see our additional guidance for 2020, we're forecasting net sales to be up mid single digits with approximately half of the increase coming from the Tuffy acquisition. We are estimating that GAAP diluted earnings per share will be in the range of a dollar five to $1.15 and adjusted diluted earnings.
As per share will be on the range up 85 to 95 cents. We also anticipate depreciation amortization will be approximately 21 million and capital expenditures will be roughly 15 million.
As we previously disclosed in an 8-K filing during the first quarter of 2020, the company will recognize that pre tax gain of approximately 11.9 million as a result of a sale nodes and release of a lease guarantee liability.
The pretax gain will be excluded from adjusted earnings.
Lastly, we anticipate an effective tax rate of 27% and diluted share count of 36 million shares to conclude 2019 was a year of facing significant market challenges, while staying focused on continuous improvement and as we look to 2020, we feel optimistic that some of our end markets.
See an upturn and we will continue to stay focused on driving margin and productivity improvements with that we will now open the line to questions.
If you'd like to ask your question at this time. Please press Star then the number one on your telephone keypad. If he would like to withdraw your question press the pound key we'll pause for just a moment tick up how the Q and a roster.
First question comes from Tyler Langton with JP Morgan.
Yeah. Good morning, I didn't Kevin Monica, Thanks for taking my question.
Good morning won it just on the the revenue growth guidance for mid single digits, I know sort of 50% is coming from the other toffee acquisition.
I guess you know on the rest can you just talk a little bit about how much confidence and maybe visibility you have on that growth, especially if you notice sort of an economic downturn with the crown virus, there's any color there would be helpful.
Yes, So let me talk to the Corona virus first we.
We source say, a very small percentage of our materials and supplies from overseas.
So at this time, we do not anticipate a significant impact from Corona virus on either revenue or costs.
However, we'll we'll continue to monitor that closely and if you know if we do start to see an impact will will update.
Well update you on that.
As far as confidence in the yeah, I think we've we feel good.
About the outlook the revenue outlook, we gave you a for each of the end markets.
Obviously, if you exclude toffee, we'd be a we'd be forecasting low single digit growth for 2020, and I think at this time, a we feel good about that that outlook.
That's helpful. And then just within material handling I know 2019 that segment benefited a lot from just price cost and productivity.
When you look into 2020 should we expect sort of more gains from that or for that largely have lapped a by this year.
Yes, so we we talked about previously as we went through out as we proceeded through out 2019.
The year over year favorability from price cost margin declined as we went through the year is still favorable but it was at a declining rate we expect that those that declining rate to continue into 2020.
So we are forecasting favorable price cost margin year over year high in 2020, but it won't be as significant as it was in in 2019.
Same thing on productivity, we expected to continue to continue to be a contributor.
In 2020.
And so I think you know as far as margin expansion in 2020 or more of it is gonna have to come from volume growth on the material handling side.
And on the distribution side, you know we have the completion of the transformation initiatives as well the Tuffy acquisition, which will allow us to to grow margin on the distribution side. So.
Thats kind of how I view margins for 2020.
Okay and then just just final question around free cash flow I guess Capex Fifteenone provided you many topics on working capital after I guess, if they use.
In 2019 or any other components.
Yeah. So.
Yeah first of all let me address capex. So the way we look at cap bags is is we think normal maintenance capex would be about 2% of our mid material handling revenue, which is roughly seven or $8 million. Obviously, our distribution segment does not have.
You know has minimal capex spend.
And so of the 15 million were forecasting about half of it is maintenance capex.
The other half I would break down between new product moulds.
Productivity projects.
And then there's also some spend related to the the consolidation of facilities and our Americar business.
So that's how I would break down the 15 million of Capex spend.
As far as working capital when I look back to 2018, we had 55 million enough cash flow I I don't think that's a sustainable amount.
Where we are as <unk> as a company and so I, yeah that was unusually high because we had really low capex spend in 2018, and we also had a significant like an 8 million dollar benefit from working capital in 2018, the flip side of that is I think the.
37 million that we did in 2019, I think we can do better than that.
We because of the lower sales volume our volume with our outsource vendors declined significantly.
In 2019 in that had an effect on payables.
We also had lower variable compensation accruals.
And so the working capital Quint kinda swung the other way on EPS in 2019, I've said before I think.
On a quarterly basis, I think 10 to 12 million of free cash flow per quarter is a sustainable amount for us.
Great. Thanks, so much.
Next question comes from Josh Chan with Baird.
Hi, good morning, Thanks for taking my question.
Oh I guess my first yeah morning, I'm not my first question is basically on the a candidate cadence of demand within material handling I guess, given sort of the tougher second half of 29 team could you just kinda talk.
Talk us through you know in terms of the the growth that you're expecting in that business, how that might kind of phase through the year in 2020. It seems like the second half is it's gonna have some pretty decent growth, but just kind of want to see how how you're thinking about the cadence there.
Sure Josh Good morning. This is Mike let me I'll kind of walk you through that through each of our end markets. So on the consumer side, where we anticipate seeing.
Improved end market demand and Kevin and Andrea and both mentioned this in their opening statements you know primarily due to the wet launch of the lawn and garden season last year in the spring. So we would expect to see some recovery in that in the first half of this year.
On the food and beverage side.
If you remember our she'd season runs fourth quarter to first quarter. So we anticipate.
The improvements that we're going to see into food and beverage end markets, primarily in the latter half of this year.
On the vehicle side, we talked about we see favorability in the inventory levels out in the field on the RV side, but that probably won't be enough to offset the softness that we're seeing in the automotive end markets.
Due to lower model launches as our teams work to expand share there and on the industrial side.
I'd say, we're going to see modest and market improvement, primarily driven by our focus in E Commerce and expanded presence in sales channels that we'll start seeing after the first quarter of this year due to a tough comp that we have over we need to overcome from last year. So hopefully that gives you some texture into each of the end market.
And what we're thinking about.
Yeah, Yeah, that's great color. Thanks, Thanks, Mike.
So curious did you see any kind of inventory de stocking in Q4 or even into kind of early Q1, just with all the kind of jittery ness around the macro market and in some of your distribution customers did you see any changes there.
This is Mike again, Josh I'll address it in the industrial space and then I'll I'll see if Chris wants to add anything and.
On the distribution side I'd say, we saw a little bit of it with some of our industrial distribution partners in the fourth quarter, but we don't expect that to have a significant hang over effect into 2020.
This is Chris I'm speaking from the distribution side I mean, we certainly saw in in the tire market.
Talking from the tires themselves, that's not our direct end market.
But from our and our customers did show a little bit of a slowdown in Q4.
And we saw that both in our demand as well as than some of the public announcements that were made as companies have reported earnings.
Okay, great. Yeah. Thanks. Thank you for that and then just last question on the on cash usage I guess I'm <unk>. How are you guys thinking about you know the capital deployment, you know is that something that might be a temporarily on hold until.
Until the new permanent CEO is identified or you know how would you be would take advantage of some of the recent stock price weakness and maybe kind of I'm getting a little more aggressive on that front.
I think for the question. This is the answer and know our capital deployment isn't on hold we're continuing to evaluate potential acquisitions that complement our existing portfolio. So we're not waiting for the me as CEO to join to do that but as we've mentioned previously at this point we are focused more on.
Proprietary acquisitions and those tend to take a little bit longer the process is a little bit longer. So we're continuing to evaluate them.
Okay, great. Thanks, Colin Thanks for the time.
[noise] once again, if you'd like to ask a question. Please press star one on your telephone if a question from Christina with Cowen.
Good morning, Thanks for taking my question you know what almost all my questions, where we're actually answered already so it. So I guess one last thing I would ask is in industrial you talked about growth in E Commerce.
And then expanded market coverage. So we did do you mean the E. Commerce is is expanding market coverage or or is this new salespeople and new territories more more boots on the ground. If you could just unpack that a little that'd be helpful. Thanks.
Sure Chris.
I think you should think about it from both sides. We've got a team that's focused on growing our E commerce business into additional market segments and we've also added some variable.
Cost sales commissions to agents throughout the industrial side of our business to help us expand deeper into additional customers and channels as well. So I think you could think about it from both sides.
All right that's helpful. Thank you.
Once again, if you'd like to ask a question. Please press Star then the number one on your telephone keypad once again that start one to ask a question.
And we do not have any telephone questions. At this time I will turn the call over to the presenters.
Thank you we thank all of you for your interest in Myers industries on your time in participation today as a reminder, a transcript of this call will be available on our website within approximately 24 hours a replay will immediately be available via webcast recall details can be found on the Myers industries website under the Investor Relations.
Yeah, Thanks, and have a great day.
This concludes today's conference call you may now disconnect.
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