Q3 2020 Myers Industries Inc Earnings Call
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Hi to 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.
These comments are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995, such.
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 companies 10-K and 10-Q filings.
I am now pleased to turn the call over to Mike Mcgoff.
Good morning, Thank you for joining us I'd like to start the call by expressing my sincere appreciation to our entire Mars team for their continued efforts during the pandemic.
Our customers countless to deliver value added high quality products, and the safe and timely manner and your efforts remain critical to ensuring that happens.
Thanks to your dedication and hard work, especially from the team at our Scepter business, we were able to deliver sales and operating results. During the third quarter. There were an improvement over last year and better than we'd originally anticipated.
Thank you Mark teammates for a job well done.
Now if you will turn to slide through the presentation will share an overview of third quarter of 2020.
And sure we had a great quarter I'm pleased with our results are direction and our progress.
We still have a lot of work to do but I'm excited about <unk> performance in third quarter.
Sales in our consumer and market increased significantly year over year as a result of higher demand for our fuel containers, which is due primarily to heightened storm activity.
We're also encouraged by the continued increase in demand that took place in our auto aftermarket business.
In addition demand for RV products, and our vehicle and market also continued to stay strong.
Our businesses delivered gross margin expansion again this quarter gross profit margin increased 400 basis points 35, 6% for the third quarter of this year. This was due to solid execution and favorable price costs margin.
As a result of the gross margin expansion are adjusted operating margin increased 500 basis points to 11, 8% and are adjusted EBITDA margin increased 370 basis points to 14, 8%.
We generate solid free cash flow of $16 $2 million during the third quarter.
And as a result, we had $84 million of cash on hand as of September 30th.
We also had $194 million available under a credit facility and our debt to EBITDA ratio was only 1.1 times.
As a result, I feel very comfortable that we have more than enough liquidity and flexibility to execute on our new strategy that I will discuss later in the call.
Before I turn the call over to Dan I would like to thank him for stepping in as interim CFO. He's doing a great job and I. Appreciate all of his efforts and hard work and with that I'll turn it over to you Dan.
Thanks, Mike and good morning, everyone. Please note that all numbers in the presentation reflect continuing operations.
Please turn to slide for.
Net sales for the third quarter were 132 million, an increase of 5% compared with the third quarter of 2019 the.
The increase in sales was due primarily to a significantly higher fuel container sales of our consumer and market driven by hurricane activity.
We also increased our auto aftermarket sales both from stronger and market demand at our legacy business and from incremental sales due to the top of the acquisition.
Gross profit margin increased 400 basis points to 35, 6%. This was primarily due to higher sales volume and favorable price cost margin.
Also gross profit in 2019 included a three 5 million dollar charge for estimated product replacement cost.
Are adjusted operating income increased 83%.
$15 $6 million for the quarter.
This was the result of higher gross profit margin, coupled with lower depreciation and amortization.
Adjusted EBITDA increased 40% to $19.6 million and adjusted EBITDA margin was 14, 8%.
Adjusted diluted EPS was 30.
Compared with 15 cents for the third quarter of 2019.
Now, let's turn to slide five for an overview of our performance by business segment in the third quarter.
And the material handling segment net sales increased 3%.
Sales of fuel containers, and our consumer and market were up nearly 40% primarily as a result of increased storm activity, However, food and beverage market sales were down high single digits due to lower seedbox volume year over year sales.
Sales to our industrial and market decreased mid single digits due to lower sales to industrial distributors, partially offset by higher ecommerce sales safe.
Sales and our vehicle and the market were down double digits of higher sales to RV customers are are more than offset by lower sales to automotive Oems.
Material handling adjusted operating income was up 59% to $16.5 million due to a higher sales volume lower depreciation and amortization expense and favorable price cost margin.
Also in 2019 and adjusted operating income included a three 5 million charge.
Four estimated product replacement cost.
And the distribution segment sales increased 10% due to $2.9 million of incremental sales from the August 2019, Tuffy acquisition and higher domestic sales and the legacy business.
Distributions adjusted operating income increased 41%.
$5.1 million, primarily as a result of higher sales volume and lower SG&A expenses.
Turning to slide six I'll review, our balance sheet and cash flow.
For the third quarter of 2020, we generated free cash flow of 16.2 million compared with $22 $1 million last year.
Working capital as a percent of sales at the end of the third quarter was nine 2%.
Which was up compared to Q3 of last year, but was lower than last quarter.
The year over year working capital increase was primarily due to higher accounts receivable in inventory balances with a strong sales in September and strategic investments in inventory that we made earlier in the year to protect our supply chain during the pandemic.
We have already begun reducing inventory balances and expect working capital to return to a more normal levels by the end of the year.
Cash on the balance sheet at the end of the third quarter was $84 million and are adjusted.
And our debt to adjusted EBITDA ratio was one one times, which is consistent with previous quarters.
Next let's turn to slide seven four are updated full year 2020 and market outlook.
Before we begin please note that this outlook is based on current and projected market conditions and there is still uncertainty around these projections.
Starting with our consumer and market the increase in demand during the third quarter was even greater than we had anticipated due to heightened storm activity. As a result, we now expect a full year sales increase in the double digit range in this market, which is an improvement from our previous outlook of a mid signal digit increase.
That said, we do not expect the increased demand we experienced in the second and third quarters to continue into the fourth quarter. Instead, we expect sales volumes and the consumer and market to return to a more historical fourthquarter levels.
And our food and beverage on market, we know anticipated revenue decline in the mid teens for the full year of 2020.
Although we expect Feedbox sales to increase year over year in queue for we don't expect demand to be as high as we originally forecast it and as a result, we expect a seedbox sales will be down for the full year of 2020.
Additionally, annual sales to food processing customers are expected to be lower year over year due to impacts from COVID-19, including delayed product trials.
Turning to our vehicle and market, while RV demand has improved we do not anticipate that the higher sales in that portion of the market will offset the decrease in sales a year over year, the automotive OEM customers.
Therefore, our outlook for the vehicle and market is unchanged with sales expect it to be down double digits for the full year of 2020.
And our industrial and market the soft demand environment and industrial manufacturing and distribution is expected to continue through the remainder of the year signs of and market improvement that we saw late in the second quarter subsided. During the third quarter. Therefore, we have lowered our industrial and market outlook to be down in the mid teen percentage range.
For the full year of 2020.
Finally in our auto aftermarket we have seen demand continue to improve and are now forecasting sales to increase in the low single digits, which is an improvement from our previous outlet of a low single digit decline.
Turning to slide eight you can see our guidance for 2020.
On a consolidated basis, we know anticipate full year sales to decline in the low to mid single digit percentage range, which is a slight improvements on our previous expectation of a decline in the mid to high single digit range.
We continue to expect depreciation and amortization to be approximately $21 million net interest expense to be approximately $4 million a diluted share count of approximately 36 million shares and capital expenditures to be roughly 15 billion.
Lastly, we anticipate that the adjusted effective tax rate will be approximately 26%.
With that I'll turn it back over to Mike who will outline in our strategy.
Thanks, Dan for your review now I'd like to talk through our new long term strategy and the strategic pillars, we have in place to drive its execution.
Please turn to slide nine.
We've developed a long term strategy, that's broken down into three discrete horizons. Each of these horizons builds on the preceding one.
The first phase, which we call horizon. One consists of three approaches self help organic growth and bolt on M&A.
Self help will focus on purchasing on pricing and on SG&A optimization.
In purchasing as an example, we're centralizing procurement and.
In the past each of our business units purchase their own products.
So we had multiple units buying their own versions of a similar raw material.
We didn't consolidate our by and leverage it will.
We're changing that approach.
We're now consolidated purchasing into a single function and will leveraged procurement companywide.
As a result will have greater leverage with our suppliers and expect to lower our costs.
A key objective of self help us to improve our margins by driving a greater wedge the trained between our raw material costs and our product sales prices.
Centralized purchasing will address a raw material costs.
On the pricing side will be using pricing and data analytics to determine where and how we can improve our pricing.
I believe and enhance focus on pricing will help identify areas of opportunity for Myers to better capture the value our products delivered to our customers.
Next is SG&A optimization.
Over the coming months, we will continue to move forward with the one Myers approach combining key elements of the company together, so that we're stronger more efficient and more effective.
Over time, we will re Orient some of our SG&A resources prioritizing sales products and market management and innovation.
As an example, we will reduce our overhead costs and we will redeploy these dollars into our sales function, increasing our number of salespeople.
The self help measures will drive profit and will fund, our organic growth and bolt on M&A opportunities.
On the organic growth side wheels.
We will strengthen our commercial capabilities we've.
We've developed a roadmap to bolster improve our commercial function. This.
This has been a key area of focus since I joined Myers.
While we still have a lot to do in this space I'm encouraged by what I see so far.
Going forward, we will go to market is one company one Myers as one Myers, we will bring solutions that are based on all of our current capabilities.
Rotational molding blow molding injection molding and thermo forming.
Having this full set of capabilities is a differentiator in the market.
Instead of separate sales team Screech business unit, who were just selling one technology now our sales force will bring all of Myers technologies to the market.
This new approach will turbocharge, our organic growth efforts.
In addition to the self help in the one company approach another big changes our approach to bolt on M&A.
We will now focus our efforts and deal flow on building our plastics business.
We will focus on deals that are close to home in terms of technology and markets.
This is a change from the past.
Now when we think about M&A, we plan to build on our current technologies and expertise in plastics moulding.
While we are strong and plastics.
We are strong and plastics, we have good brands and we are number one or number two in the areas where we participate.
Going forward, we will embrace our polymers heritage and we use bolt on M&A to expand are offering and plastics moulding.
Speaking of M&A I'd like to provide a short update on the top the acquisition.
It's been just over one year since we purchased tufting manufacturing and combined it with our Myers tire supply business.
We purchased talking to the right price at the right time.
We integrated smoothly and efficiently and as a result is performed above our expectations.
In order to ensure that we successfully integrate future acquisitions that will likely be larger and more complex than the <unk> acquisition we've.
We brought on Dave Basque, who had many carve outs and integrations Adele Davis, putting in place a robust process to successfully integrate future acquisitions.
Over the next quarter I expect us to share proof points on this part of arched of our strategy.
We believe that by executing on the strategy under horizon, one we can grow Myers to $1 billion in annual revenue and our target is to be at that run right by the end of 2023.
Now I'd like to speak to the second step Verizon too.
Horizon to will be built from the profit generated from successful execution of horizon one.
Verizon two will continue to include the self help initiatives organic growth initiatives and bolt on M&A, However, and horizon too we shift gears. It will begin executing larger enterprise level acquisitions, we will continue building and growing in the plastics and polymers space, who just execute at a greater scale.
We will continue to focus on specialized value added products and stay away from commodity products just as we do today.
Experienced we gain from completing the bolt ons and horizon, one will compares to successfully execute larger acquisitions under horizon too.
In addition to the enterprise level.
Level M&A and horizon too, we also expect to be in a position to grow in adjacent technologies.
As examples we may build out the unique capabilities, we haven't thermal forming oren rubber processing or metal fabrication as it stands today, we have a small presence in each of these and and it appears we have meaningful organic growth opportunities to build them out.
Our long term vision concludes with horizon, three which is geared around going global.
I can see a path to grow Myers to approximately 2 billion in revenue, while largely staying in the United States.
However to grow beyond that threshold and enter horizon, three we will likely need to expand globally via M&A.
Although this is a few years off it's important to have the vision and the direction for the company.
In order for Myers to reach its full potential we will need to go global and expand and low risk attractive countries outside of the United States.
The organic side of horizon three.
We plan to father builds on our plastics backbone, but also evaluate expansion into other substrates.
An example would be metal substrates and there'll be more to come there.
As asking ask you to turn to slide 10, so I can speak to the discipline and focus with which we will execute.
A roadmap for execution includes our strategic objective as well as for supporting pillars.
Our strategic objective is to transform the material handling segment into a high growth customer centric innovator of engineered plastic solutions, while at the same time, we continue to optimize and grow the distribution segment Meyer.
Myers is in a great position.
We have excellent technologies and products and the material handling side, and we have deep industry knowledge and experience with and a strong foundation on the distribution side.
Make no mistake, our company's features bright or runway as long and I can't think of anywhere else I'd rather D.
We have four pillars that are simple and clear and we'll drive execution. They are organic growth strategic M&A operational excellence and high performing culture.
These four pillars are the cornerstones of Myers transformation and will ensure we successfully delivered the goals and objectives of horizon one.
The first pillar focuses on organic growth and we'll address four areas.
Sales and commercial excellence.
Innovation and new product development.
Sustainability and E. Commerce. These four areas are clear priorities that Myers and are the primary levers to drive organic growth.
Speaking of sustainability, we recently announced that we've joined the alliance and plastic waste a global nonprofit organization committed to ending plastic waste in the environment.
Our focus on sustainability will help drive innovation and our long term growth.
We're proud to be a part of the alliance and look forward to helping shape future projects that recover.
Create value from and ultimately eliminate plastic waste.
Our second pillar strategic M&A is geared around bolt on opportunities that build on our plastics franchise.
Courted. This effort is our integration playbook that will ensure a world class approach.
To acquisition integration.
The third pillar operational excellence is part of the Myers DNA.
Out of the Myers Foundation, and we will build on it we will continue to have a mindset of continuous improvement.
And we will build out the functions of pricing purchasing and sales and market management into our core capabilities.
The fourth and final pillar is the heart of the company or culture.
We will build a high performance mindset and culture.
A key tenet of our culture will be our focus on safety.
We have a good safety record, but must work to get better every day.
Talent development will be a priority as well we will develop a talent in house through the creation of continuing education learning Academy and on the job training.
We can achieve greatness without being an employment player of choice to that and we must build our culture in three important areas inclusion serve in leadership and community involvement.
And future presentations I will provide a report out on our progress on each pillar.
I'll close here and I'll share with you my confidence in excitement on our new direction.
We have a strong plastics business with the broad suite of technologies and expertise.
We are now focused on building this engine and growing it's scale organically and through M&A.
In addition, we have a well regarded industry, leading auto aftermarket distribution business with a promising outlook.
Could not be more excited to lead this company today and into the future with that I'll turn it back over to Monica.
Thanks, Mike Joanne, we're now ready to take questions.
As a reminder to ask a question you need to pass star one on your telephone to withdraw your question constant pounder hash key Keystone bodily composite Q&A roster.
First question comes from the line of Kim margins from Bird. Your line is now open.
Nice job and thanks for all the details.
A 10, thank you.
Maybe just starting with the long term vision here I guess.
I'll start off with a three part question.
No you've you've laid out.
$1 billion revenue target by 2023, which I think on the surface that's pretty ambitions. So I guess first how would you kind of think of the mix there between organic and M&A and.
Just how committed are unique to actually getting to that number over that time frame and then lastly, when you need to it sounds like you will be able to kind of self fund the investments.
But I just wanted to kind of to to run through that a little bit.
Yeah, Tim So just to clarify what I said was $1 billion run right at the end of 2023 and I agree with you. It's an it's an ambitious club, but I would look at it.
Run right at the end of 23, the split off I'd say give or take three quarters will be M&A, one quarter will be organic ballpark.
And what was the other question.
Just in terms of the the investments on the organic side to kind of get there and maybe some of the M&A investments you'll have to make it sounds like that will be self funded through kind of SG&A overhead reductions, but I just wanted to verify that desk.
That's correct that's correct on the self help side.
Some room to run there and also like I said is not only driving that wedge on the price side in the procurement side, but also reallocation reallocating some of that SG&A.
Trim, and our overhead and redeploying that into into salespeople. The example, I gave.
Okay is there a way to quantify or frame, what's centralizing procurement.
Might be able to generate for you guys just just to try to frame it for us.
Well.
Look let me I'll look to Dan to see if he wants to give any specific advice. What I can tell you is when oftentimes we had four or five businesses buying very similar raw materials and it was subscale I think it was a great deal far suppliers, but it probably wasn't the best deal for Myers, so, bringing that together consolidating negotiating and aggressively should should and.
A lot of value, but only asked Dan for any specifics.
I think it's a little early to give savings targets.
As we work through it but we do see a lot of opportunities.
As we look across the different businesses.
Acting as a single company.
Okay, Okay, and then on the M&A side, it does sound like the pipelines.
Pretty actual at this point like we could actually see something here by by by year end is.
Do you think kind of early on in this in this vision it'll be kind of more bolt ons versus larger deals and.
How would you kind of described valuation in the M&A market right now.
Town. So let me see if I can unpack it a bit.
Yeah. So now that we're focused on plastics and building up the plastic season I is not to say look on the auto aftermarket sign at the deal came through and it was the right deal and the price was attractive force. We look at that the really our focus is more on the polymer side and building building building some scale.
These technologies.
The pipeline is good the valuations we won't do any deal does not accretive.
And most of the deals that we're looking at.
Have a strong component of cost and growth synergies software very confident that there'll be value, creating for our shareholders.
What was the what was it an additional questions.
Yes, it was.
Yeah, just valuation, but I mean, I think you kind of answered it with the yeah, but so Tim on the bolt on side.
Look healthy went well.
It has succeeded our expectations were real pleased with how tough he went well I'd like to do is step that up in size.
Get some larger deals on the manufacturing side and ideally I see two to four deals there over the next year.
Year to 18 months.
Think we will really fine tuning ourselves with regard to integration excellence.
I want to bring some of those skill sets from my past past companies into Myers, we're doing that and and then I think we could look to even larger deals that that'd be more of a horizon to exercise.
Okay, Okay, great I'll hop back in queue. Thanks for the comments and against appreciate it. Thanks.
It.
Your next question comes from high Ness managed to the tens FM Cohen Cohen <unk> Company. Your line is now open.
Hi, guys congratulations on the great quarter.
I just have a couple of questions Moby disorder follow on regarding things one of horizon.
And I appreciate for the 75%, 25% split in terms of M&A versus organic to get for that million dollars run right by the end of 2023. So that suggests that you are going to buy roughly $375 million worth of revenues.
You are trainable men around the one times sales type multiple you said that you won't do with yogurt is not accretive. So if we assume sort of you're paying a little bit better than me a little bit less than one times. That's that's about 370 or should we think about $350 million to $400 million is kind of more what.
You are going to deploy towards M&A over the next few years is is that fair.
That may be a little heavy but let me ask Dan to comment.
I think.
Strikes me a slightly heavy.
But we're.
We're going to look at the deals and up the right deal is out there.
Right.
We'll see what we can do.
Yeah, well this year.
Go ahead sorry.
I was just gonna say.
<unk>.
There are a number of independents, an owner operated plastics technologies companies.
That the ownership is aging looking for liquidity.
Opportunity and.
Would prefer not to sell the private equity and so we're actually getting good traction in the market as a strategic buyer at fair prices. So I'm excited about the outside there.
So in the meantime, now you swung to a net cash position in the quarter and I'm wondering is there an opportunity to prepay. Some of your outstanding notes and then just avoid the the negative carry in the near term yes.
Yeah, I'll, let Dan.
So are are notes are private placement. So we've been the pillows off of it in the normal course.
Okay.
Okay.
Any any update on the CFO search.
Lance so like I said, Dan stepped in is doing a real fine job, we've got to retain national firm.
We're vetting a number of candidates are interviews start next week.
Okay and then.
Is.
Given the M&A outlook is that basically does that sort of suggests that we should we should not be thinking about an increase in the dividend anytime soon.
For sure I'll tell you the the dividend as I've said before sacrosanct, that's important to us as Ah.
And it's important to me on increasing the dividend I don't want to comment at this point.
Okay.
And the last seats for me just in terms of the bolt Ardeb could you could you give me an example of the kind of.
Non commodity products that you don't currently sell that you could potentially add to the portfolio.
Yes, I would say it you continue to look at Blow-molded injection Motorola molded.
Devices tanks.
Products unlikely products that are big and bulky and immune largely from overseas competition.
Like the products that are I call him semi specialty your value added that there is some level of difficulty in the fabrication and so the barrier to entry is is centered around process knowhow rather than just the press configuration and so those are the types of products. We seek is rather not single use blow-molded bottles.
Lance, but but some level of technology, Noel and capabilities. So that there is some level of a competitive moat. Those are the products. We currently have we currently do well with them and I want to build on that area.
Okay. Thanks, guys I appreciate your time thanks.
Thanks Lance.
Again, if you would like to ask a question. Please press star one on your telephone.
Your next question comes from the line of Carl Sham from Keybanc Keybanc capital market. Your line is now open.
Hey, good morning, congratulations on the quarter everyone.
Thank you just wanted to.
Just wanted to dig in on some of these.
Pretty big shifts in the.
Way and markets are kind of trending here.
So maybe I'll just start with.
Obviously, the fuel container sales.
With the storm activity just curious.
And the timing of that did any of that carry into the fourth quarter is that just purely.
<unk> impact, what's what's kind of dynamic there.
Yeah. So we're looking at that as a as a cute and Q3 activity. It really follows along with the with the storm activity. So while we did just have a storm.
In the Gulf, It's a little early to tell how much impact there was specifically in the fourth quarter of the the the.
The flow through her as a little less.
Okay.
Great that's helpful and then.
Put in beverage.
Pretty big ship, there and what you're kind of looking at first seedbox.
Can you just maybe give some more color on what.
What.
What maybe change there and I think you would have mentioned in the past Feedbox is sort of a mix tailwind.
Larger higher margin gross margin area is that.
How does this impact kind of how you're thinking about gross margin or <unk> and <unk> of 21.
So we don't typically get a lot of visibility <unk> demand until the end of the third quarter.
And so while we still expect it to be gray.
Greater than last year.
It's less than we were originally forecasting so.
Our updated guidance there.
Okay great.
Sure. Okay, and then just last one on neo kind of wanted to follow up on the.
Mmk discussion here I'm just curious.
I'm sorry, if I missed it do you have sort of a net debt to EBITDA that you're kind of willing to stretch to in the near term Napier considering some more bolton size.
Yes, Carl our objective is to stay below three times.
If we needed to crank up temporarily we could do that but really that's longer terms three times.
Okay. Thanks, that's all for me.
Thank you thanks Paul.
Okay.
There are no further questions at this time I will turn the call back confidence dissenters.
Thank you.
We'd like to thank all of you for Ya Anticipant Myers industries enter 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 deep.
Details can be found on our website under the Investor Relations tab, Thanks, and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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