Q2 2022 Myers Industries Inc Earnings Call
and benefits from the trilogy plastics and Mohawk rubber acquisitions. Although we continue to experience cost inflation, which partially offset our growth, gross margins still increased 260 basis points to 32%, compared with 29.4% for the second quarter of 2021. Adjusted operating income increased $8.5 million, or over 56%, driven by higher growth profit, partially offset by increased SG&A expenses. The higher SG&A expenses were due to the acquisitions of trilogy plastics and Mohawk rubber, higher salaries and incentive compensation costs, increased freight and other variable selling expenses, and higher facility costs. Adjusted SG&A as a percentage of sales increased to 22% in the second quarter, compared to 21.3% in the prior year, primarily as a result of inflationary impacts. Adjusted EBITDA was $28.9 million, an increase of $8 million, or 41% compared to the prior year. Adjusted EBITDA margin expanded 150 basis points to 12.4% for the second quarter, compared with 10.9% in the prior year. Lastly, adjusted EPS was 45 cents, an increase of 16 cents, or 55%. Please turn to slide five for an overview of our segment performance for the quarter. Beginning with material handling, net sales increased $36 million, or 26%, including the trilogy acquisition, which occurred at the end of July 2021. On an organic basis, material handling net sales increased approximately 19%, driven by favorable pricing of 20%, and partially offset by decline in volume mix of 1%.
Organic net sales increases in the vehicle, industrial and food and beverage markets were partially offset by a sales decrease in the consumer market. Additionally, the sales decrease in the consumer market drove the 1% decline in volume mix and the period. The sales decrease in the consumer market
Material handling's adjusted operating income increased $11 million, or 65% to $28 million, primarily driven by the continued benefits of our ongoing strategic pricing actions.
Inflationary pressures related to labor and other manufacturing costs, along with the change in sales mix, partially offset these benefits.
SG&A expenses were hired primarily due to the Trilogy Plastic acquisition. Higher salaries, benefits, and incentive compensation costs increased freight and other variable selling expenses and higher facility costs.
In the distribution segment, sales increased $10 million or 20%
Excluding the incremental $6 million of net sales from the Mohawk rubber acquisition that we completed the beginning of June , organic net sales increased 8%, primarily driven by pricing actions.
Distributions adjusted operating income increased a little over 1% to $4.3 million. The contribution from higher pricing was mostly offset by an increase in product cost and higher SDN expenses year over year, which were primarily due to the Mohawk rubber acquisition and higher variable selling expenses.
Turning to slide six.
Free cash flow was $21.1 million compared to $11.7 million for the second quarter of 2021.
Cash flow from operations increased 84% in the quarter, primarily driven by higher earnings.
Working capital as a percentage of net sales increased 110 basis points compared to the same period last year. The increase in working capital was primarily a result of the trilogy plastics and Mohawk rubber acquisitions. The effects of inflation, higher counts receivable balances driven by higher sales, and an increase in inventory levels to mitigate supply chain disruptions and to better serve our customers.
Capital expenditures were $5.9 million for the quarter and cash on hand at quarter end with $22.4 million. And cash on hand at quarter end with $22.4 million.
Overall, our balance sheet remains strong with leverage at 1.2 times. Our capital structure continues to provide us with the flexibility we need to execute on our long-term growth strategy. And we've done our long-term growth strategy. We've done our long-term growth strategy.
On slide seven, we shall our updated outlook for fiscal year 2022. Given the strong start to the first half of the year and the recent Mohawk rubber acquisition, we now anticipate that our net sales growth will be in the high teens range, compared to the previous outlook of an increase in the low to mid double digit range.
We expect approximately 45% of the sales increase will come from the trilogy plastics and Mohawk rubber acquisitions.
We are also updating and raising our full year 2022 outlook for adjusted EPS from a projected range of $1.30 to $1.50 to $1.60.
We continue to expect SG&A expenses to be approximately 22% of net sales, primarily reflecting ongoing investments in our people, processes, and operational efficiencies.
Other key modeling assumptions include depreciation and amortization expenses of approximately $23 million and CapEx of approximately $25 to $28 million.
Interest expense is forecasted to be approximately $6 million and the effective tax rate is forecasted to be 26%.
With that, I'll turn the call back over to Mike to provide an update on our strategy.
Thanks, Monica. Please turn to slide 8.
Our long-term vision is clear and compelling. It's our game plan. It's deliberate. It's consistent. Our associates and our investors understand it. They support our roadmap and what we expect Myers Industries to become.
We continue to make progress against our three horizon strategy and I'm pleased with the pace at which we are approaching our Horizon 1 goals and preparing for Horizons 2 and 3.
As a reminder, the elements or building blocks of Horizon 1 remain self-help, organic growth, and bolt-on M&A, and I'll speak a bit to our progress on each.
And the first element, self-help, are internal pricing excellence group and commercial teams have continued working together to build capability, bringing an analytical approach to pricing, convened to our customers, the value our products bring, and pricing those products accordingly.
As I mentioned last quarter, we have focused on making Sales and Operations Planning, or SNOP, a core competence at our company.
We're rolling out robust SNOP processes across all of Myers.
Completing this work over the next 12 to 24 months.
With improved SNOP, we are able to make more product more efficiently.
We move faster with less stress on our capital equipment and on our people.
Last quarter I spoke about being in a successful rowing crew. Flailing less, being smoother, more graceful, and moving faster with less effort. That analogy still applies very well to our progress here.
In the second element, organic growth, buyers have the 7th sequential quarter of double-digit organic growth driven by resilient or improving customer demand levels in ag and industrial which outshine the impact of some pullback in demand in consumer and RV.
Organic growth remains a key area of focus for us and we continue to drive it through extensive sales training and through e-commerce. Health initiatives have spoken of in past calls.
Our approach to achieving organic growth is consistent.
In order to make lasting change, we have to have a simple approach and we have to stick to it.
As a result, you hear me speaking to the same initiatives, such as sales training, value-based pricing, and a commerce quarter over quarter.
This consistency and simplicity may seem boring, but it's deliberate and it's proving to be effective.
By executing the first two elements of self-help and organic growth, we will continue to see improved divot-daw and cash flow. And our ability to execute on our third element, ball-pine M&A will continue to improve. Ball-pine M&A will continue to improve.
In the element of bolt-on M&A, we had two important acquisitions during the second quarter.
the acquisition of an additional rotational molding facility in our material handling segment, and the acquisition of Mohawk rubber cells in our distribution segment.
We believe that both of these acquisitions will allow us to continue to improve our ability to provide excellent customer service and value to our customers.
As you will recall, we'll drive the execution of our vision and strategy by breaking down the elements into four strategic pillars with specific action items tied to each pillar. Please turn to slide nine.
I'll address each of our four pillars, starting with organic growth our first pillar.
As I mentioned earlier, we achieved double-digit organic sales growth for the seventh consecutive quarter. We've also seen consistent and strong bottom line growth, which has allowed us to invest in our people, our equipment and our processes. We've seen a lot of growth in our people, and we've seen a lot of growth in our people, and we've seen a lot of growth in our people, Please.
We've hired exceptional new people, and we've infused capital into our plants.
We've also been able to do more work on innovation and new product development, ensuring that we bring new and valuable solutions to our customers. We've been able to do more work on innovation and new product development, to our customers.
We continue to focus on sustainability as we believe this is an important area and an area where myers is strong.
Lastly, we continue to focus on growing through e-commerce, the channel has continued to grow, and it's becoming more profitable.
We're very proud of the organic growth we've been able to achieve, and we view it as the key driver to feeling the other pillars of our strategy.
Shifting rightward to our second pillar, strategic M&A. In May, we acquired the Decatur, Georgia-based rotational molding manufacturing assets of Step 2 Company.
This transaction marks our third meaningful investment in rotational molding in under two years and will enable increased production capabilities by expanding our footprint and our manufacturing grid into the southeastern United States.
This provides the stability to service our customers from coast to coast.
This geographic expansion is a beach head and should enable us to grow nicely over the next years. And should enable us to grow nicely over the next years.
We're also pleased to announce the recent acquisition of Mohawk Rubber Sales, a high quality customer service focused company with a great reputation in the auto aftermarket space.
The addition of this high quality team in Mohawk's well-placed distribution centers add scale to our distribution business, improving our ability to service the market and increase the profitability of the business. And increase the profitability of the business.
We believe our approach to M&A, acquiring tuck-ins that improve our capabilities or coverage, makes sense.
Our acquisitions to date have brought us either complimentary products
Complanar geographic coverage for both.
Our prior Elkhart and Trilogy acquisitions are good examples of this, and they continue to contribute to our top and bottom line results.
are good examples of this, and they continue to contribute to our top and bottom line results. Very exciting.
Our integration playbook and skill set are improving in becoming a core competence.
Our integration capabilities get better and better with each transaction.
As bigger, more complex opportunities present themselves, we will be ready in capability and in financial capacity. We will be ready in capability and in financial capacity.
Over the next 12 to 24 months, we believe we will have opportunities to add meaningful capabilities and assets to Myers. We will have opportunities to add meaningful capabilities and assets to Myers.
We will be ready to capitalize on opportunities as they emerge.
As you'll recall, we wanted to do a few smaller bolt-on acquisitions earlier in our journey so we can learn and grow while we create shareholder value.
We done just that.
Now moving to our third pillar, operational excellence, which has been a key factor in the margin expansion we've experienced so far. We've experienced so far. We've experienced so far.
As a result of our recent improvements in operational excellence, we've been able to lower our cost and increase our production.
Through S&OP, we've optimized our supply planning, demand planning, and plant scheduling to maximize production and better serve our customers. added
By doing this, we're finding we have more capacity available. Our plants and our people can produce more. We call this the hidden factory.
capacity that's available but not initially apparent due to it being masked by sub-optimized production schedules and production planning. In effect, it was hidden.
These revelations are exciting. In some plants, we've identified up to 20% more capacity than originally expected. This is particularly helpful when we've had sold-out situations and needed more product for our customers.
Operational excellence is a key pillar in achieving a more strategic objective in our horizon-1 goals. Operational excellence is a key pillar in achieving a more strategic in achieving a more strategic objective in our horizon-1 goal. Operational excellence is a key pillar in achieving a more strategic objective in our horizon-1 goal.
Our fourth filler is focused on culture.
With another full quarter under our belts operating with a one-mire's culture and mindset, we continue to see the benefits.
We have more alignment, more collaboration, more growth, both with our customers and with our employees in their careers.
Numerous examples are emerging of our employees working together across our entire product portfolio, across our segments and business units to take care of customer needs.
This did not happen in Meyer's prior holding company approach, and in my opinion, was a missed opportunity.
In addition to being one company in collaborating in ways we never have before, we're also transforming buyers by building a culture of servant leadership.
This mindset is core to who we are, living to serve our customers, our shareholders, our communities, and each other.
Servant leadership is a low ego approach and it's a culture of rolling up our sleeves and getting the job done. Servant leadership is a low ego approach and getting the job done.
This culture and mindset will be key to our success in Horizons 1, 2 and 3, and I'm pleased that the progress so far.
Before it closed, I want to put a special spotlight on sustainability at Mars Industries.
In July , we published our first ever ESG report.
I'm very proud of what the team has accomplished in ESG, which will add another dimension to our strong culture.
The report highlights Myers' transformation into a sustainability company.
Mires can create significant shoulder value while improving the environment.
Our sustainability story was previously untold.
We're now beginning to tell us. Our inaugural ESG report is our first step in communicating our sustainable approach, and we look forward to updating as we go forward. When we look forward to updating as we go forward.
In closing, I'd ask that you remember the following. Meyers is transforming. The company is rapidly improving and is strong and resilient.
The execution of our strategy is brought consistently improving performance.
Yes, we still have uncertain year term macro's to navigate, but we believe we have the right strategy.
The right execution roadmap, the right people in place to excel in times like these and to drive continued long term value creation for our stakeholders.
I'm excited for our future for the continue transformation of Myers Industries into a world-class company.
As I say on every call, I like the progress I see and we are transforming the company.
And as I say on every call, we're just getting started. We're only in the early innings of what's possible for Meyers Industries.
With that, we'll now turn the call over for questions.
Thank you. So if you would like to ask a question, please press star followed by 1 on telephone keypad. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure your phone's on meter low key.
Our first question comes from Lance Vitanza from Conan Company. Please go ahead.
Thanks and good morning, Mike and Monica, and congratulations on a great quarter.
I guess I wanted to start in the materials handling segment. You didn't mention anything in the release about slowing demand or recession or pullback, although I did hear you on the remarks a minute ago talk about some uncertainty, macro uncertainty and so forth. How would you describe the business environment as you are seeing it today? And if possible, could you just sort of walk me through the major end market categories and.
discuss where things stand. I mean Monica, it sounds like consumer was the weakest category, but if you could perhaps flesh that out a little bit more for us, that would be great. Thanks.
Yeah, so I'll add some colors and I'll ask Monica to build on that.
In general, we're seeing resilience in our demand across the majority of segments, the perception being consumer discretionary and RV.
In the areas where RV, consumer, which would be our portable fuel containers, as well as some of the high-end, highly engineered product that we got through the trilogy acquisition, we're seeing some softening of consumer demand at the high-priced, high-quality items, similar to what you hear from a number of other companies out there who are reporting. But for the base business, the core business, we're seeing resilient demand, particularly in ag, that's actually continuing to be strong, and also in industrial...
So decline in volume mix was driven by consumer and that was all other markets. Our most other markets were up in the quarter from a volume mix perspective. So it's definitely consumer that's driving the decline. Yeah. Lance, we flagged that at the last quarter call. The portable fuel containers being a little soft. We're continuing to see that. That's a high priced item in the retail space. And just consumers are spending money filling up their shopping cart with the necessities. So we're seeing some of that.
What has emerged a bit more is some softening in RV. And again, it's a bit early to tell how extensive that trend will be, but that's caused us to have a little bit of caution in our outlook.
Okay, that's helpful, thank you. So consumer maybe is the culprit there. On the other hand, Meyers is indeed making a margin on the price increases that you're putting through, which is what you said would happen when we spoke last. It's somewhat unique, at least in my coverage universe. Most of the people that are putting price increases through are just trying to cover their incremental costs. Now, with Meyers in fact, I modeled.
over a 40% incremental gross margin on the incremental revenue. So, and that's despite higher labor costs, negative mix shift. Can we expect this net margin benefit to continue in the back half or does this reverse at some point?
Yeah, Lance, that margin should hold. As we've discussed on these calls before, it is different than what I think a number of others are reporting. We brought in a lot of focus on getting our costs down and pricing our products to the value they create for our customers and we're getting good traction in the market. What I say in general is what's different about Myers is, we really were coming from a low starting point.
over the last years and for what we're seeing the results now on a quarter versus quarter basis. And really for the next years our results should continue to be impressive because of where our starting point was.
If I can squeeze in two more before I pass the reins here. On the SGA front, $52 million obviously reflects only a partial period for MOHA.
You know, would 55 million be kind of like a good run rate estimate for FGN going forward or if it's easier, you know, in terms of percent of revenues, FGNA was up 100 basis points. I think it was to 22.4%. And you called out inflation as the culprit and a surprise there. But do you see inflation continuing to put upward pressure on the percent of revenues from here or do you think, or should we think that 22.4 is that sort of a good level?
for us to use going forward. Hi Lance. Yeah, we've guided the 22%, SG&A at 22% as a percent of sales for the entire year. I would say in the second half that's going to be the same case, even with the acquisition of Mohawk maybe slightly above that. But you can model for both quarters around that same percent. Yeah, Lance, you know, we are going to invest in the company. We're investing in innovation. We're investing in our people. We're bringing new capabilities.
We've done a lot of that over the last two years, and we're not going to retrench or pull back on that. But what I also say is we've brought in a number of folks that are quite hawkish.
on how they manage SG&A and SG&A budgets. And so, as you would assume,
We are preparing a number of different plans and scenarios on how we would need to treat our discretionary cost. If demand got a little bit weaker in the future. So I feel really good about that. I feel that we've got it under control and we know the right decisions to make. To not force it all that we built on growth. But it's the same time to maintain discipline and how we spend our money, how we spend a sheenate.
And lands that would be a little bit lower than the 55.
Okay, I mean, I was just going to say it would seem like now is the time for you to be, I mean, you're making some of these investments to allow for continued growth at a time when despite those investments, cash flow and earnings are way up. So, you know, it seems like this would be the time to do it. And then lastly, for me, just on the M&A front, you know, I guess the first is progress integrating Mohawk and, you know, and then beyond Mohawk, how does the pipeline look?
today in terms of viable targets? And then also, access to capital, management bandwidth, you've been very active. Is there a sense that you might need to take a pause on the M&A front or could you move forward quickly if another situation attractive were to present itself?
Yeah, Vlad, so I'll take a shot at it and if Monica wants to follow him behind, she's more the welcome to some Mohawk acquisition in the last.
Two of the last three weeks, I've been in the field with Mohawk teammates and at their DCs and talking with their commercial folks and operational people. That integration is going well. It is complimentary to our business. There was not a lot of overlap in terms of geography and customer mix, and I'm really pleased with their culture. They've got an outstanding culture. And that's really what we're finding is
definitely a nice feature when we're acquiring companies is that cultural fit on our capacity. We've said all along is we're going to do a few bolt-ons that are helpful in terms of
acquiring capability or geographic coverage.
I think we've been thoughtful in acquiring the right companies at the right prices that have created value. But what it's also done is it's helped us kind of find our track legs, our sea legs around integration.
And we are getting more and more proficient with integration and our processes and the efficiency with which we operate. A coupling that with a number of the people I've brought in of recovery. Quite frankly, I don't think this is quite vital. But thing that I mostly think about the very thing about the stress that just became quite visible is how much some concern of the strain anno Grady adaptation, patient, but at what moment is it stolen that you
very capable, very skilled at identifying negotiating deals and then also integrating. So, that is very machines like drawing machines and also integrating deals and then solo. Emplening doing paper crossingfun?funisffunisffunisf veux ?? Holling l? pling toe paso dos pling gliss lo Cong vertex ins and then also integrating.
And so, you know, we're ready. That's where I really want to make a number of points is, we're still in the market, we're still active. I really think that if there's anything you would take away is I think we're going to be hitting stride.
right when other potential companies are getting less expensive.
And sometimes it's just serendipitous how things work out. But I really think we're gonna be hitting stride in our capacity and our ability to transact right when things get out.
things to get softer and more affordable. Monica, any additional points? Yeah, I would just reiterate what I said on the call, that we have, you know, our balance sheet remains strong, we have low leverage, we have plenty of flexibility, we have the capacity now to do additional bolt-on acquisitions and the capacity or flexibility to do even larger ones down the road.
And I got the central guys, I got the sense that perhaps the next that was issue, well, that the size and scale of these acquisitions is kind of be biased to the upside from here. Is that a fair inference or am I reading too much into your comments?
That's fair Lance, that's fair.
Thanks, Ray. It's a big help. Yeah, thank you, Lance. Appreciate it.
Our next question comes from Steve Boga from Keybank Capital Markets. Please go ahead Steve.
If your line is now open, you may begin your task or question.
Thank you.
Class any further questions? Please press star for the one and telephone keypad.
It appears we have no questions at this moment, so we're going to hand it back to the management team for any final remarks.
Thank you.
Thanks to everyone for joining us today. We appreciate your interest in myres industries. Have a great day.
This concludes today's call. Thank you for joining. You may now disconnect your lines.
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