Q2 2020 Myers Industries Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Myers industries, 2022nd quarter earnings call.
At this time all participants are in a listen only mode. After the speakers presentations will be question answer session ask a question during the session in the press Star one on your telephone. Please be advised that today's conference is being recorded if you're acquiring further assistance. Please press star zero I'd now like us and the conference over to Miss Monica Vinay. Please go ahead.
Thank you good morning, welcome to Myers Industries' second quarter 2020 earnings call I'm, Monica Vinay, Vice President of Investor Relations and Treasurer Myers industries.
Joining me today, or Mike Mcgaha, President and Chief Executive Officer, and Kevin Brackman, Executive Vice President and Chief Financial Officer.
Earlier. This morning, we issued a news release outlining the financial results for the second quarter of 2020, if you've not yet received a copy of the release you can access it on our website at Www Dot 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 transaction on 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 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 is set forth in the company's periodic SEC filings and may be found in the company's 10-K and 10-Q filings.
I'm now pleased to turn the call over to Mike Mcgarr.
Good morning, Thank you for joining us first I want to say, how proud I am of our employees, especially how they pulled together to deliver solid results during a challenging quarter bosses staying safe.
Due to the focus and dedication of our teams we were able to deliver sales and operating results that were better than we had originally expected.
Now if you turn to slide three of the presentation, we'll share an overview of second quarter 2020.
As we noted in today's release, our businesses performed well during the quarter.
We continue to meet our customers' needs, we delivered higher than anticipated sales despite challenges the complexities, resulting from the koby 19 crisis.
Sales in our consumer end market increased significantly year over year as result of higher demand for our fuel containers.
We were also encouraged by the increase in demand that took place in our auto aftermarket sector. What stay at home restrictions were lifted in more vehicles returned to the road.
Our businesses delivered gross margin expansion again this quarter adjusted gross profit margin increased to 36% in the second quarter of 2020, compared with 35% a year ago.
This was due to solid operational execution and favorable price cost margin, which more than offset the lower sales volume during the quarter.
As a result of the gross margin expansion in SGN a cost reductions are operating margin was flat during the quarter. Despite the 12% decline in sales.
We're also pleased that we generated positive free cash flow of $3.7 million during the quarter as a result, our balance sheet remains strong, but we continue to have significant liquidity to support our operations and our growth initiatives.
Our entire team remains dedicated to staying safe, while meeting our customers' needs and profitably growing our businesses. We remain confident that our company has the financial strength the high quality products in the right growth strategies to emerge as a stronger organization in the future. Once this crisis subsides.
Most importantly, our second quarter performance as our second quarter performance demonstrates we have an industry leading team capable of generating strong results even in the most challenging of circumstances now I'll turn the call over to Kevin for more details on our second quarter financial results a discussion of our outlook on sales trends.
In our full year guidance.
Thanks, Mike and good morning, everyone.
Please note that all numbers in the presentation reflect continuing operations. Please turn to slide four.
Net sales for the second quarter were 118 million a decrease of 12% compared with the second quarter of 2019.
The increases we saw from the fuel container sales into consumer end market and this healthy acquisition in the distribution segment, where more than offset by sales decreases across the rest of our end market growth.
Gross profit margin increased 100 basis points to 36%. This was primarily due to favorable price cost margin and lower operating costs.
Our adjusted operating income decreased 14% to $12.3 million for the quarter. The adjusted operating income margin was flat despite the lower sales volume.
Was the result, as the higher gross profit margin as well as lower adjusted SDMA expenses year over year, due primarily the lower variable compensation and cost reductions.
Adjusted diluted earnings per share were 23 cents compared to 27 cents for the second quarter of 19.
Now, let's turn to slide five for an overview of our performance by business segment.
In the material handling segment net sales decreased by 15.7% as anticipated the challenging business environment led to sales declines in that food and beverage vehicle and industrial end markets. These declines more than offset a large sales increase in the consumer end market, However, though lower.
Our overall sales volume was partially offset by favorable price cost margin a positive sales mix and lower operating costs. As a result, the segment's adjusted operating income margin increased to 90.5% compared with 18.3% for the second quarter out last year.
In the distribution segment sales decreased 2.2% as incremental sales from the August 2019 acquisition of Tuffy manufacturing.
Partially offset a decline in sales across the remainder of the segment as Mike mentioned earlier demand in this end market improved throughout the quarter as stay at home restrictions were lifted closures east and motor vehicles, where on the road.
Currently sales during the quarter were better than we had anticipated.
Distributions adjusted operating income decreased to 1.6 million for the second quarter of this year compared with 3.3 million a year ago, primarily due to unfavorable sales mix. This was the result of two factors first and unfavorable product mix due to higher sales of equipment versus consumables during the course.
And second and unfavorable mix of acquisition versus base sales volume.
As a result this segment's adjusted operating income margin was 4.4% compared with 8.7% for the second quarter of 19.
Turning to slide six I'll review, our balance sheet and cash flow.
For the second quarter of 2020, we generated free cash flow 3.7 million compared with 9.4 million last year.
Working capital as a percent of sales at the end of the second quarter was 9.9%, which was higher than in previous quarters. The increase in working capital was primarily due to higher accounts receivable in inventory balances due to strong sales in June and strategic investments in inventory to protect our supply chain.
During the crisis.
We expect working capital to return to normal levels by the end of the year.
Fashion on the balance sheet at the end of the second quarter was 72 million and our debt to adjusted EBITDA ratio was 1.2 times, which is consistent with previous quarters now, let's turn to slide seven for updated 2020 revenue and end market outlook.
It's important to note that this outlook is based on current and projected market conditions and there's still a lot of uncertainty around these projections.
For the full year, we now anticipate and percentage sales decline in the mid to high single digit range, which is a slight improvement from our previous expectation of an approximate 10% decline year over year.
Now, let's review our current outlook for each of the end markets, starting with our consumer end market. The increase in demand during the second quarter was even greater than what than we had anticipated as a result, we now expect the sales increase in the mid single digits for the year in this market compared with our previous outlook.
One digit increase.
In our food and beverage end market, we continue to anticipate a mid single digit increase in revenue for the full year.
As last year's demand for seed boxes was unfavorably impacted by a late spring season and customer consolidations, we anticipate improved demand in the upcoming season, which as a reminder will occur in the fourth quarter of 2020 and first quarter of 2021.
Turning to our vehicle end market, while demand in the RV market has begun to improve we do not anticipate that the second half improvement will be enough to offset the decline in sales that we experienced during the first half the year.
Additionally, demand in the automotive end market continues to be saw therefore as a result of the anticipated full year decline in both RV and automotive customer sales. We expect to we continue to expect vehicle end market sales to be down double digits for the full year 2020.
In our industrial end market, we continue to expect us off the demand environment and industrial manufacturing throughout the remainder of the year.
As a result, we've maintained our industrial end market outlook of our percentage to be pretty in the low teens for the full year.
And finally in our auto aftermarket because demand began improving more quickly than we had anticipated one stay at home restrictions were lifted we're now forecasting sales to decline in the low single digit range compared with our previous outlook of a high single digit decline.
Turning to slide eight you can see our guidance for 2020 as I just discussed we anticipate sales for the full year will be down mid to high single digits, which is a slight improvement over our previous forecast seven approximate 10% decline.
We continue to expect depreciation and amortization to be approximately 21 million net interest expense to be 4 million.
Diluted share count of approximately 36 million shares and capital expenditures to be roughly 15 million.
Lastly, we anticipate an effective tax rate of 26%, which is slightly lower than our previous guidance of 27%.
With that I will now I'll turn it back over to mine.
Thanks, Kevin and before we take questions I'd like to close a few comments.
I want to thank the entire Myers team for the tremendous job they did and helping us achieve solid financial results during the second quarter.
Thanks to their efforts, we were able to meet the critical needs of our customers and our communities in an extremely challenging operating environment.
In the coming months, we'll have a sharp focus on delivering profitable growth and increasing shareholder value.
In our material handling segment, we intend to use a disciplined M&A process.
Our businesses that build on our technological strength in plastics manufacturing.
In addition to M&A, we aim to grow organically.
Building out our commercial sales and marketing capabilities.
We're strengthening our teams that our focus in these areas and expect to see positive results in the future.
And distribution will continue to execute our transformation and continuous improvement initiatives.
These include winning new business growing key accounts, enhancing and expanding our ecommerce platform and optimizing our supply chain to lower costs, while improving service level.
By focusing on our strategy in driving an execution mindset, we will continue to deliver solid results into the future.
Im excited to be on this journey and I believe our teams are well positioned for growth.
With that we'll now turn it over for quick.
If you'd like to ask a question at this time. Please press Star then the number one on your telephone keypad, if you'd like to withdraw your question press the pound.
First question comes from call Chen with Keybanc capital markets.
Hey, good morning, congratulations on the quarter.
Thank you My first my first question for Mike just now that you.
I had a little more time and your position just kind of broadly what metrics are you considering most importantly.
In the business and maybe philosophically.
How how does how are you thinking about capital deployment.
Yes. This is I appreciate the question.
From a metric standpoint, clearly cash flow is important to operating incomes important.
Now.
I won't get to the menu ship, but we're looking at a number of other control mechanisms on how our businesses operate.
Our customer satisfaction levels order fill rate what you'll see is again. This is a very solid company. When it comes to operations a very solid company. When it comes to our technologies of where I'm looking to build is on our commercial capability.
Customer facing capability and that and we'll do that in the future.
As it relates to capital allocation the dividend continues to be sacrosanct and its top importance I see no.
Don't see no.
Carriers are delivering the cash flow to cover our dividend or even even in challenging times.
We're going to continue to invest the capex levels, we've committed to in the past us split between maintenance and also growth capital.
If you look at our business, we've got a strong balance sheet and the takeaway here is where we're going to continue to play offsets were going to continue to exercise our strength and build.
Even in even in times that are uncertain when others may be a little more cautious. This is a chance for us to take share and getting business and then before I wrap up the other piece is just the deployment of capital into M&A.
We continue to see a robust pipeline in a number of the plastics technologies and we are.
We are ramping up the activity there and more to come.
Great. Thanks, that's all for me.
Thank you.
Next question comes from land for Tenda with Cowen and company.
Thank you. Your line is open. Please go ahead.
Sorry, guys I'll have Mike loan stuck on the thanks can you hear me now.
Yes, good morning, a great great Hey.
So just maybe the first just a follow on Carl's question, Mike you talked about the company is really well well said with respect to production then internal controls and so forth in that you're you're on the opportunity for you is really one of the customer facing side.
And then you also close by saying that you wanted to be you wanted to be on offense, there, but is that really possible given coded or how do you need to necessarily be out a bit of because there were no. Do you think you can actually make progress on your primary objectives. In this environment could you talk about that a little bit and then I've got some more specific questions.
For Kevin and so forth.
Yes sure labs.
Philosophically you want to be strong when others are fearful and we've got a good business. We have good people and good operations and we've got a great balance sheet, we're not worried about liquidity.
So that allows us to focus on growth and we're going to continue to build out those parts of the company's focused on on growing I find that we've got these technologies within our business unit silos, and there's not enough cross selling that's being done theres not enough solutions, providing our solutions mindset. This is all it's all opportune.
City.
The businesses are dialed in the company's Dow then operationally, but we need to have more of a growth mindset and just to be Frank I'm pleasantly surprised with the opportunities that we have here.
On the organic side as well as the M&A side.
No for sure I think this is exactly the time when we need to be.
We need to play office.
Thanks, Okay and then.
Kevin If you could talk with I know you you went through.
Struggling to keep up but could you repeat what you'd said had grew again the gross margin strength I got that there was some operational improvements, but I missed the first half.
Yes, so we can.
Gross margin strength, we had favorable price costs.
Margin in the quarter.
Compared to last year, and then also we we did a nice job with cost control.
Really both in cost of sales and SDMA and so.
Those were the two big factors that drove the.
The gross margin improvement.
Do you see those areas, where there so the of the nature of that would suggest sustainable going forward or you know where these you have to sort of.
Repeat these every quarter I mean, I guess im just trying to think about our estimates going forward. How we thought about the business margin years margin was up quite a bit from what we and I think others had expected.
Yes so.
Let me talk about margin I guess by segment I think it'll be easier because there's a lot movie is for for both segments.
So in material handling I do expect that we will continue to expand margin in the second half the year.
Theres really three.
Three big factors driving that one.
One is more favorable revenue year over year so.
First half of the year, we were down 12% revenue for the enterprise.
Where we're forecasting a mid to high single digit decline for the full year spend means we're going to be roughly flat in the second half of here.
I would say that helps with with margin.
And and specific to material handling I'm a in my comments I noted that.
We are expecting growth in seat bunch revenue starting with this upcoming seed season.
It starts in the fourth quarter.
So we are expecting growth as an enterprise in revenue in Q4.
So thats one thing the price cuts margin I mentioned I expect that to continue to be favorable year over year, maybe not as significant as the first half the year.
But as should continue.
To be favorable year over year, which is mostly.
The fact that resin costs remain below prior year levels.
Then the third thing on the material handling side, if you remember in the third quarter last year.
We had a three to half million dollars charge for product replacement costs, which obviously, we don't expect to recur this year.
So for those three reasons I expect margin to continue to improve year over year in the second half.
In the distribution segment.
We really had to mix factors that hurt our second quarter and I expect both to continue into the second half of the year. One is a product mix. So we are selling more equipment and fewer consumables.
Equipment carries a lower margin and so that has a negative mix impact on our margins.
The other which was a significant impact on Q2 is and I made a comment about this and I was.
Hoping to clarify.
Is it's a mix between acquisition revenue and legacy base revenue.
So in the first year post acquisition.
The incremental revenue from the acquisition is going to fall through at kind of an operating margin in other words, it's going to be fully loaded and it's going to include the fixed costs of the business.
The decline in revenue on the legacy side of the business year over year, that's going to fall through at more of a contribution margin.
So you can be the difference between an operating margin on the acquisition revenue and the contribution margin on the.
Legacy revenue that can be in.
20 percentage points them.
Engine differential and so that as a you know.
Yeah, It's a big hurdle, it's a it's a big impact we've said before that our annual.
Revenue from Tuffy is about 20 million, so roughly 5 million at quarter.
So.
Like I said Thats a.
Significant impact on Q2, we expect that.
To continue into the second half now we completed the tough the acquisition at the end of August. So obviously once we lap the acquisition date.
And that impact will go away.
That's super helpful. I have two more questions if I could.
The first is actually maybe just sticking with the distribution segment.
The weakness there is that just less traffic on the road equals less need for retire repaired you mentioned that it sounds like that business already began coming back strong what's the travel restrictions are lifted so I would have expected maybe a better outlook.
For the back half of the year, given we've seen a resurgence in you know just so the number of miles being driven.
Is there anything else going on there.
Yes, Lance this is Mike up we do have Chris do Paul here, who you know is the president of the distribution segment. So I'll, let Dan I'll ask Chris to address those.
Hi, Andrew So first up when you look at Q2.
The impact of Cobot 19 on the.
On the industry end market with its fairly significant if you look at some of the broader indicators that tend to drive some of the volume in our visit in our business replacement tire shipments were down for the quarter on 30% to 35% range miles driven for the first two months of the quarter were down on in about that same but.
All park.
As we got towards the end of the quarter. We were very encouraged as we started to see the economy opening back up.
Have been really pleased that the way we've seen volume return in June and.
As we move into the third quarter as we look into the back part of the year.
No one has a crystal ball here.
What we're looking at our some of the broader industry projections around where we see the end market for Tyree tread repair.
And we're tracking our our volume forecast sort of in line with that.
Makes sense Tonight, I guess the bottom line is with fears of second waves and were surgeons and so forth.
Virus is probably better to remain.
We'll have a little bit of a cross selling slipped my last question is actually back on the materials handling side, but it ties in to the same theme.
In that we've been we've been reading that RV sales had seemed to have been picking up as a result of coded just doesnt satellite you guys are seeing any flows through obviously, there's there's a big difference I shared between the end market sales and then when it would potentially.
Flow through to either to the equipment manufacturers, but wondering if that resurgent sales was that just a flash and Japan is there anything that we should be thinking about there is hope that we might have seen a more encouraging outlook versus the double digit declines that you were looking at in vehicle last time.
Last so this is Mike let me take that one.
That was it actually Elkhart last week with several big customers of ours to gauge that very point.
Yes, I think the consumer trends the way people are looking at vacations. The implications from cobot I think the RV industry has got a lot of runway, that's probably going to be years and not quarters or months.
We're well positioned there from a technology standpoint, and partnered with the leading RV manufacturers. So I feel good about that piece of our business.
In addition, the boating side.
As you May recall, we make a plastic parts engineered parts takes seats et cetera for the pontoon boats and fishing boats. Those businesses are doing quite well also so I think the outlook there is solid.
Quite frankly, I wish it was even a larger point of our portion of our revenue when times are good, but we're well positioned what I'm trying to figure out is how do we sell more of our existing technologies into those segments.
That's not going to be.
That's not going to be something that delivers results in the next weeks or months such as more of a longer term thought process is how do we get more of our great technologies into those industries, but I think the runway for RSV is quite strong.
And I'm excited to be a part of it.
Really as an eye opening visit with our customers last week was through with regard to how much the demands there.
Thanks, So much guys I appreciate it I'll pass it on.
Thank you.
Once again, if you I'd like to ask a question. Please let's start from the number one on your telephone Keypad next question comes on Gen with Baird.
Hi, good morning, Congrats on a very solid quarter in the current environment.
Thank you. Thank you.
Yes, like there was a nice to hear about sort of the strategic thinking there you mentioned M&A could you just talk a little bit more about what are the kind of property of both companies that you are looking at and is the current environment kind of creating some dislocation into markets that you might be able to take advantage of.
Yeah. That's a good question. So we brought in a in even more disciplined.
Wait and look at our funnel.
The outbound calls, we're making the inbounds we're receiving.
We had good rigor before I'd like to think we have even more rigor in that space now we've got an excellent leader in that space, who knows it quite well on the M&A side.
Where I'm looking to build is on the plastic side, we've got great technologies.
Theres a number of.
Lower middle market.
Avidly held companies in this space of wrote a molding injection molding blow molding thermoforming debt that we believe would add to our capabilities allow us to deliver more to our customers give us more power in the channel.
To deliver better products, but also to earn better better returns.
And those the areas that we're looking at it.
Like I said I'm pleasantly surprised with the opportunities out there we're going to continue to focus is not on the commodity side, but more on the specialty side. The engineering materials side. So if the plastic parts have an element of technology.
Our difficult to produce I'll have some sort of barrier from.
From Chinese competition or from other competition, where we can actually deliver value to our customers and get paid for that value.
Yes, there were focusing and quite frankly, thats, where myers products. Our position today were out of that commodity space were more in the technologically advanced stays on my plastics technologies and I really see to build that out I am excited about that about that side as well.
So I'll stop there any any any does that help.
Yeah, that's definitely helps and it's encouraging to see that there might be more opportunities there.
So on the consumer business I'm, just wondering has the momentum that you saw in Q2 kind of continue into into Q3, I would think that it might but the guide doesn't seem to assume very much growth in the second half those couple of more about that.
Yes, I remember that.
In that business really our strong season runs from line March through July.
So short of any hurricane activity in that business.
We are nearing the end of their strong season, and so thats why.
Like I said shorter per account you would expect it to get a lot softer.
Starting in Q3.
Hi.
And I guess my last question list this might not be a very near term dynamic, but if in the future commodity prices were to increase what happens historically it was sort of your ability to get price and do you think that you can kind of align.
Those two and in a relatively close manner.
Yes, I think so we've said before some of our.
Some of our pricing is actually index to the to the resin cost so.
There may be like 60, 90 days delight lag.
In.
In that price in a minute.
The change in the resin costs happens.
But certain percentage of our revenues actually index and automatically that jobs.
And then you know where we don't have mechanisms in place we employ.
Value based.
Pricing.
Valid, yes, no Mike wants to add anything to that yes. Thanks, Kevin That's well said you know where I look at our near term priorities for the company is as we talked about growth in the commercial excellence piece. There that includes sales but also.
I am more analytical approach to how we do finished goods pricing.
The other piece.
On the procurement side, there, we do a fine job there, but there's opportunity to centralized procurement across our divisions and and go more aggressively and you will.
More to come there and then the third pieces the integration capability and playbook I feel that's an area that would like to fortify with our company as we move forward more aggressively into acquisitions.
I want to be sure we have a very robust process on integrations and obtain synergy. So you didnt ask is that way, but those really the three areas I'm I'm working on the short term.
That's great thanks for highlighting on opportunities and good luck.
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Thank you.
Once again, if you're like ask your question. Please press Star then the number one on your telephone keypad. Once again that start wanted to ask a question.
And he does not have any telephone questions. At this time I will turn the call over to the presenters.
Thank you.
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 when the within approximately 24 hours.
A replay will be immediately available via webcast recall.
Details can be found on our website under the Investor Relations tab, Thanks and have a great thing.
This concludes today's conference call you may now disconnect.
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