Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to be Myers Industries, Twentytwenty first quarter earnings Conference call.
At this time, all participants are any listen only mode. After the speaker presentation. There will be a question and answer session to ask a question during the session, we'll need to press star one on your telephone keypad.
If you require any other assistance. Please press Star then zero.
I would now like to hit the conference over to your Speaker today Monica Vinay. Thank you. Please go ahead NIM.
Thank you.
Good morning, and welcome to Myers Industries' first quarter 2020 earnings call.
Monica Vinay, Vice President of Investor Relations and Treasurer at Myers industries.
Joining me today, our Mike Mcconnell, 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 and Crist Apollo group President distribution.
Earlier. This morning, we issued a news release outlining the financial results for the first quarter of 2020, if you've not yet received a copy the release you can access it on our website at Www Dot Myers industries Dotcom, it's under the Investor Relations tab.
It's called 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 Mike 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.
Good morning, and thank you for joining us a privilege to be with you today My first earnings call as the CEO of Myers industries.
Before we go to our first quarter overview I went to think Andrey important for her leadership as interim president and CEO during the transition period.
We will continue to benefit from androgens contributions to our team. It's your returns to her role as executive Vice President Chief Legal Officer Secretary.
I also want to think the leadership team and our employees for keeping the company moving forward. During this interim phase, which had additional an unexpected challenges related to covert night team.
Well done team.
I'd like to spend a few minutes to tell you about my background and what attracted me to Myers.
I was fortunate to have had nearly 25 years with the Dow chemical company with significant experience in polymers in plastics.
The opportunity to lead several business units and functions around the world and spent significant time, leading business portfolios focused on growth and on innovation.
Also in Dallas I worked extensively in M&A and an integration. These experiences will be helpful. As Myers executes on the strategy, which includes organic growth and bolt on M&A.
Most recently I spent two years as chief operating officer at BMC stock Holdings, a manufacturer and distributor a building products focused on growth and innovation continuous improvement.
Bolt on M&A and gaining a competitive advantage through its people centric culture.
The strategic pillars, and BMC aligns very well with the initiatives we have underway at Myers.
I was attracted to Mars, because it's a solid well operating company with significant opportunities in a strong balance sheet.
We have high quality products, leading market share positions and exciting potential for long term growth.
Since arriving I've also been impressed with the talent a commitment in organization.
The cobot crisis, our employees have remained dedicated to serving our customers while ensuring their own safety.
Our people are our most important asset and we're leading the company accordingly.
Now if you'll turn to slide three of the presentation, we'll share an overview of first quarter 2020.
Demand in some of our end markets will solve for much of the first quarter.
We had anticipated weakness in food and beverage and Dave when markets that are not anticipated to see auto aftermarket in industrial end markets would be a saul.
During the month to March our businesses were impacted by the Kobin 19 pandemic.
Well the negative side, we solved demand for the decline in the auto aftermarket in industrial distribution in markets on the positive side demand increased in our consumer end market as customers begin buying more fuel containers.
A combination of all these factors led to a 12% decline in sales for the quarter.
As we noted in our earnings release, despite the current challenges in demand environment I just outlined our team continued to deliver gross margin expansion.
Adjusted gross profit margin increased from 32.9% a year ago to 34.8% for the first quarter 2020.
This was due to solid operational execution in the overall favorable margin expansion, which more than offset the lower sales volume during the quarter.
Adjusted income from continuing operations was 22 cents per diluted share compared with 23 cents for the first quarter 2019.
Regarding our balance sheet. It remains strong we have significant liquidity to support our operations in our growth initiatives, including $73.2 million in cash.
194.2 million available under our revolving credit facility as of March 31st 2020.
Looking forward, we will continue our focus on executing our strategy to deliver profitable revenue growth.
We have the plans and investments in place to capitalize on our competitive advantages.
In the short term our priorities are to ensure the ongoing safety of our employees.
As we continue to manufacture and distribute the essential products our customers require.
Including material handling containers for food processing and health care facilities.
Portable fuel containers for consumers entire repair products for truck fleet companies.
To accomplish this we definitely rented a pandemic preparedness and response plan.
It includes working remotely where possible social distancing.
Increased clean protocols in a pay program for boys be tested or 14.
We are developing in refining contingency plans to help mitigate potential risk to the business and to capitalize on opportunities as we moved to the next few months.
As we look forward, we'll be implementing a return to work plan to ensure that continued safety of our employees our communities in our customers.
Our entire team is dedicated to stay say, we're confident in our company has the financial strain.
The high quality products in the right growth strategies to emerge stronger when the crisis subsides.
Now I'll turn the call over to Kevin for more details on our first quarter financial results in a discussion of our outlook on sales trends.
Thanks, Mike and good morning, everyone today, I'll review, our 2021st quarter financial performance as well as our updated sales outlook and full year guidance. Please note that all numbers in the presentation reflect continuing operations.
Please turn to slide four.
Net sales for the first quarter were 122 million a decrease of 12% compared with the first quarter up 19. The increase we saw from the Tuffy acquisition in the distribution segment was more than offset by a sales decline in that material handling segment.
Adjusted gross profit margin increased 190 basis points to 34.8%. This was primarily due to favorable price cost margin.
Our adjusted operating income decreased 4% to 11.7 million for the quarter.
However, the adjusted operating income margin increased 80 basis points to 9.6%.
Despite the lower sales volume.
This was the result of the higher gross profit margin as well as a decrease in adjusted as gene 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 22 cents compared to 23 cents for the first quarter up 90.
Now, let's turn to slide five for an overview of our performance by business segment in the first quarter.
In the material handling segment net sales decreased by 18.3% as sales declines in the food and beverage vehicle and industrial end markets were only partially offset by a sales increase in the consumer end market.
However, the overall label lower.
Overall sales volume was partially offset by favorable price cost margin and lower variable incentive compensation costs. The segment's adjusted operating income margin increased to 18%.
Compared with 16.8% for the first quarter of last year.
In the distribution segment. The August 2019 acquisition of tough he manufacturing led to a 5.6% increase in 2021st quarter net sales over last year as Mike mentioned earlier sales have dropped off significantly in this market since the middle of March adjusted operating income increased to 1.9.
In for the first quarter of this year compared with 1.1 million a year ago as our transformation actions continued to deliver cost savings. The segment's adjusted operating income margin was 4.9% compared with 3.1% for the first quarter of 19.
Turning to slide six I'll review, our balance sheet in cash flow.
For the first quarter up 2020, we generated free cash flow 2.5 million compared with 2.4 million last year.
Working capital as a percent of sales at the end of the first quarter was 7.9%, which was higher than previous quarters. The increase in working capital was primarily due to higher inventory and accounts receivable balances.
Cash on the balance sheet at the end of the first quarter was 73 million.
And our debt to adjusted EBITDA ratio was 1.2 times.
Now, let's turn to slide seven for our updated 2020 end market outlook.
Based on current and projected market conditions, and our best estimation at this time of the potential impacts of covered 19 around which there is a lot of uncertainty. We now anticipate that sales will decline approximately 10% year over year in 2020.
We also anticipate that sales in the second quarter will decline approximately 20% was 60% of the decline coming from the material handling and the remainder from distribution.
Let's review our current outlook for each of our end markets.
Starting with our consumer end market during the first quarter. We saw an increase in end market demand that was further boosted by cobot 19, and as a result, we continue to expect for the full year. This market will be up low single digits, we remain optimistic about our food and beverage end market. Despite a sales decline in the first quarter.
And then expected decline in the second quarter as well for the year. We now anticipate sales will be up mid single digits was which was down slightly from our previous outlook of up high single digits, because last year's demand was unfavorably impacted by L., each spring season and customer consolidations.
We anticipate increased demand for seed boxes in the upcoming seeds season, which as a reminder occurs Q4 2020 to Q1 2021.
Turning to our vehicle end market, while sales to RV customers were up during the first couple of months for the year. They started to decline in March and have continued to decline during the second quarter.
As expected sales to automotive Oems decrease during the first quarter. This was due to a weaker global vehicle environment and the impact that cobot 19.
We expect the weaker environment to continue we also expect there will be fewer new model launches. This year as a result of the anticipated full year decline in both the RV and automotive customer sales. We now expect vehicle end market sales will be down double digits in 2020 compared.
With our previous outlook up down low single digits.
In our industrial end market sales to our industrial manufacturing customers were soft during the entire first quarter, while sales to our industrial distribution customers, including E. Commerce sales softened towards the end of March as a result to cope with 19 and a shift in demand to health and safety products weeks.
Back the soft demand environment in industrial manufacturing will continue throughout 2020 and as a result have updated our industrial end market outlook to be down low teens compared with our previous outlook of up low single digits.
Finally in our auto aftermarket, we're now forecasting sales to be down high single digits versus our previous outlook of up low teens.
Demand in this end market was soft most of the first quarter, but really dropped off the last two weeks in March we expect this weakness to continue and more than offset the incremental sales from the August 2019 Tuffy acquisition.
Turning to slide eight you can see our guidance for 2020 as noted in our press release due to the uncertainty related to the duration and extended the potential impacts for uncoated 19, we have with drawn our EPS guidance as I just discussed we anticipate sales for the full year 2020 will be down.
Approximately 10%.
We also anticipate that sales in the second quarter will be will decline approximately 20% with 60% of the decline coming from material handling and the remainder from distribution.
We continue to expect depreciation and amortization will be approximately 21 million.
And capital expenditures will be roughly 15 million.
Lastly, we anticipate an effective tax rate of 27% and a diluted share count up 36 million shares with that we will now open the line to questions.
At this time, if he would like to ask a question. Please press Star then the number one on your telephone keypad I cannot have started the number one.
We will pause for just a moment to come home because many roster.
Your first question comes from the line of Tyler Langton with JP Morgan.
Yeah. Good morning, I, My Kevin Monika I hope, you're all staying well no. Thanks for taking my question.
I guess, the first off a as part of the the revenue guidance for down 10% for the I guess he expect consumer.
And food and beverage to be up a little bit and there's obviously some benefit from easier.
Over your comps, but I guess can you just talk a little bit out you know how much visibility you have to fund on demand that you expect for the year.
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[laughter].
Okay.
I'm sorry.
Yeah bidding for about a month now I'm actually a finding my way in learning how to our business listening meeting where a lot of our of our associates. Unfortunately, because of the pandemic that slowed up some of the opportunity to visit our facilities and meet our customers meet our suppliers. That's a they'll be underway since possible. So with that question I do have my balance.
You know here or do you know is the group president of that segment. So let me pass it over to Mike.
Thanks, Mike Good morning, Tyler.
So as you know and we've talked about this in the past we tend to get visibility into the upcoming.
AG season in the third quarter and the upcoming AG season, as a fourth quarter first quarter business.
So we anticipate having greater visibility into that.
I'd say mid to late third quarter of this year and we're as Kevin mentioned I think in his comments were somewhat optimistic based on the fact that we're coming out of a soft season last year due to the late planting and the wet spring weather.
The consumer end market side I.
I think Mike Magaro I mentioned this in his comments I mean, we saw.
Pretty good impact tied to a carbon 19 for revenue related to those markets.
And then we're benefiting from it earlier start to the spring season. This year and as you know again that market was impacted by the slow start and wet spring last year as well. So right now we've got pretty fair visibility into the consumer end market and we'll have better visibility in the food and beverage side mid to late Q3.
Great. That's helpful. And then just with no price cost I'm like especially sort of in material handling. It was a benefit last year seemed to be a benefit this quarter.
Excuse talk a little bit that what drove it you know this quarters is yeah I think some of the benefits we're supposed to tail off this year and then I guess, given where resins are.
It's any initial thoughts on what that.
The benefit it could be for the year.
Yeah, I mean, it was a it was primarily driven by lower raw material costs.
And we do expect the benefit the year over year benefit does start to tail off. So if you don't we we received a significant year over year benefit from price cost margin in 2019 and again in Q1.
We expect the the favorability to continue.
But at a declining rate it won't be as significant as it was in Q1.
For the remainder of 2020.
Great and then just as a final question I think Mike you mentioned in your your opening remarks.
I think you sort of looking at you sort of bolt on M&A and that potential.
I mean, if that's something we expect that to maybe sort of be put on hold for a little bit just yesterday's yahtzee deal with healthy and certainties from from Cobot 19 or is that something how do you sort of your kind of looking at you know sort of currently.
Yes sure Tyler.
It's remains part of our strategy remains part of our focus.
We continue to be active in the market.
We continue evaluate opportunities and anticipate job over the next quarter or two more walk to these may emerge, but you know it's got to be the right deal.
Right time and of course at the right price.
Got it perfect. Thanks, so much I appreciate it.
Thank you.
Your next question comes from the line of Josh Chan with Baird.
Hi, Good morning, everyone and welcome Mike The girl.
Thank you.
Yeah, maybe stepping back from the current environment for a minute here Mike you mentioned in your remarks, you know some opportunities that you see it admires could you talk a little of about you know what those are I I know you mentioned M&A, just as a minute ago, but and maybe elaborate a little on that.
How are you sort of balancing sort of the longer term vision, but so to the near term environment here.
And Josh, Yes, I'm happy to I'm happy to answer that what I found that Meyer. So far is our business units are well operated operated with a lot of discipline. So that's a positive.
What I'd like to do is is help us find a way organically to grow more in addition to the bolt on M&A and so there's a number of processes that we haven't have underway I hope to bring in.
Some additional focus on growth organic growth and ER.
My perspective being here for a month, the company's well poised for that.
Our businesses have great market share, we have good leaders running them, they're well disciplined and now I'd like to find a way to turbo charge that growth and I'm working with the union leaders to do that so.
A lot of process is underway and I think there's just more to come there.
All right that's good to hear.
Appreciating that you know you didn't give you P.S. guidance for the year I guess could you maybe walk through some of them moving pieces in terms of how we should think about margins maybe in material handling what what's the typical you know volume decremental you'd expect from the business and and you know how does.
Your rail and kind of cost control initiatives, you know kind of factor into that.
Yeah, if I guess I can you know Kevin covered a bid on the resin side and again I hope that I expect that that will be a benefit.
I can bring to the company as well as you know they the years I had in that space.
Clearly, we're going to continue to work to procurement side aggressively and hope to to hold onto that margin as much as we can but on the specific nuances of beyond the resin side, let me ask Kevin to step in any comments there yes.
So.
When I when I think about margin.
In 2019, we had a 9% decline in revenue, but we were still able to expand our operating margin and I'm talking across the company because my comments.
We'll apply to both segments.
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The the reason we were able to do that there were three significant year over year benefits in in 2019, one was price cost margin that I talked about.
A second was incentive compensation and a third was a restructuring action that we completed in March of 19.
Our distribution business and so we received to our realized.
Three quarters of year over year benefits in 2019.
When I look at 2020, all three of those items should continue to be favorable year over year, but not nearly as significant as they were in 2019.
So that's true both price cost margin and incentive compensation and then the restructuring actions, obviously, we realised three quarters in.
2019, which only leaves one quarter, which was the first quarter of this year as far as year over year benefit.
So that for that reason I think our ability to expand the or even maintain operating margin is gonna be a lot more challenging and 2020 with another 10% revenue decline that were currently forecasting. So that's that's how I'm looking at margin.
And why we then I would.
Consistently expand margins despite lower revenue in the past.
But I think that's gonna start to become a lot more challenging up in the remainder of 2020.
Okay. Yeah. That's that's very helpful color. Thank you and then my last question I think it's just sort of regarding your outlook for the year and I guess in both businesses basically is there any kind of verticals, where you're expecting a return to growth in the second half.
I know you mentioned food and beverage and that doesn't make sense, but you know sort of power you're thinking about the trajectory in the and the other businesses.
Josh Good question and answer just a lot of uncertainty I'm sure you've heard that time and again over the course of these calls we're doing our plans were putting together and building off of our growth strategies growth tactics customer by customer. We're looking to if we can gainshare use our financial strength use of horsepower that we've got that I.
I just described to come out of this and play office. There's just so much uncertainty business by business, we've talked about some upside in consumer I think that's that's valid he others, it's just too difficult, but I'll look to see if Kevin has any additional color Mike Valentina.
No I don't have anything to add to that yeah.
Alright, great yeah, thanks for the color and thanks for class.
Thank you. Thank you.
Your next question comes from the line as Chris <unk> with Cowen.
Good morning, everyone. Thanks for taking my call a couple of questions from me first off just generally are or your employees back to work or where are we in that process and if that's the later set up versus your estimates how might that affect the actual I'm new revenue guide.
And then in terms of all the different segments in which you you've taken down the sales outlook is there any portion of that that's attributable not not simply to overall reduced economic activity and lower customer orders, but specifically somewhere where you are having an issue with the supply chain and.
Keith meet demand because of something but.
Lower down supply chain or something like that.
Yeah, Chris Let me Oh. This is Michael I'll I'll take a shot if that with regard to our facilities. We only have one plant that we had to take down about a month ago and that was our facility in America card or in the southern Michigan all of other factories have been deemed essential when they're operating.
From a from a business unit standpoint, and a corporate staff standpoint, just like everyone else, we've been operating virtually all of our homes using doesn't tools more than we ever thought we would.
But what we found is that is actually proven to be remarkably effective.
This the human element and human contact, but we've been able to get business done as we talk about a here make product shipped product sell product and so we're getting that done the weakness and softness in uncertainty is just more on the on the customer side also.
Stuff well operating well with the exception one plant that when the process of bringing back up its been but the demand comes back.
What was it and what was about the second question, Chris Deep into the question was as end market driven or is it supply chain or the reason for their revenue outlook trial. So I'll share my thoughts there as well it's Oh, it's market driven you know the supply chain, where we've had a long lead time products, we've actually approach.
Actively built that into our inventories of our raw material inventories are in good shape. It's just more of a demand issue, but we've made some some forward buys on some products that we thought may be tough to get.
Okay. That's helpful. Then just finally I don't think the Capex guidance of 15 million was was change would have to double check it but I think it's the same as last last time you reported so.
Reading too much into that in the sense that did not change in capex like that you're really not concern.
From a liquidity standpoint, or what the long term effects of Coke 19 are gonna be like all the plans you had booked before the end of 2019, you're still spending and executing on there.
Yes, so you're correct, we did not change our capex outlook, it still $15 million.
Remember first of all on the Capex side about half of that is is maintenance capex. So we want to continue that due to.
To do that spending.
And then the other half is is growth and productivity projects. They're made there may be some flexibility with that second half.
To defer some of that if it becomes necessary, but we did not include that in the outlook for the time being.
Your comments about liquidity are are right on the money. We we have a strong balance sheet. We finished the first quarter was 73 million of cash.
And we think our liquidity position really gives us the flexibility.
To deal with the uncertainty that that this situation presents and so we feel good about that.
So we'll continue to assess it there maybe opportunities to defer some capex spending will assess that but we haven't updated our outlook at this time.
That's really helpful. I appreciate everyone. Thanks.
And again, if he would like to ask a question. Please press Star then the number one on your telephone keypad again that is stronger than the number one. Your next question comes from the line Josh Chan with Baird.
Hi, yes, thanks for taking my follow up question not just just going along with the point that Kevin just made so get near that very strong balance sheet. So there shouldn't be any expectation to adjust the dividend given the downturn in any way right just one other come from that.
Our.
Our plan is to maintain the dividend yeah. I think we've we've reviewed a number of different downturn scenarios for the remainder of 2020.
And you know I I think there are a number of other measures and actions we would pursue first.
Before we would look to change the dividends our plan.
And preferences to maintain the dividend at current levels.
That's great. Thank you.
Your next question comes from the line of Carl action.
Hi, good morning.
Good morning. This one.
One question on the distribution side I know you said.
Sales dropped off the last couple of weeks in March I'm. Just curious maybe if you were to talk from an organic.
Ah growth perspective, excluding the coffee acquisition kind of how sales progressed, maybe in the first couple of weeks in the month and then a into April.
This call. This is Mike Mughal again, just as I passed the question often like Valentino on the core holding all else Christy Paul to comment on that Who's our group President.
Yes. Thank you for the question so of the quarter did start off a little bit thought that softness was in line with what we're seeing in in the market more broadly.
We think we can do you need to main or gained share in the first part of the quarter, but we were just seeing overall, you know lower volumes lower average order sizes.
And some delays and some large orders that came later in the quarter.
The real shift for the for this segment game in the in the back part of Mark.
Where we saw significant drop off particularly in passenger light vehicle side of the business.
And that that softness or that that shutdown in demand has has continued into Q2, which is what's driving our revenue guidance for the segment around Tito.
Great. Thanks. This is.
If I build on that.
Similar discussion that we've had as well the Chris is teams are focused on using the financial strength using the strength of the company to gain share to play off this.
And to grow as we come out of this.
Great. Thank you that's all I had.
Thank you.
Yeah, no further questions at this time.
Thank you we thank all of you for your interest in Myers industries and 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 be immediately available via webcast recall details can be found on the Myers industries website under the Investor Relations.
Tab, Thanks, and have a great day.
This concludes today's conference call you may now disconnect.
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