Myers Industries, Inc. (MYE) Q3 2018 Earnings Report, Transcript and Summary

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Myers Industries Q3 2018 Earnings Call. [Operator Instructions] Monica Vinay, Vice President, Investor Relations and Treasurer, you may begin your conference.

Thank you, Sharon. Good morning. Welcome to Myers Industries third quarter 2018 earnings call. Joining me today are Dave Banyard, President and Chief Executive Officer; Matteo Anversa, Executive Vice President, Chief Financial Officer; and Kevin Brackman, Chief Accounting Officer. Earlier this morning, we issued a news release outlining the financial results for the third quarter of 2018. If you've not yet received a copy of the release, you can access it on our website at www.myersindustries.com under the Investor Relations tab. This call is also being webcast on our website and will be archived there along with the transcript of the call shortly after this event. Before I turn the call over to Dave and Matteo for remarks, I would like to remind you that we may make some forward-looking statements during the course of this call. These comments are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and involve risks, uncertainties and other factors which may cause results to differ materially from those expressed or implied in these statements. Further information concerning these risks, uncertainties and other factors is set forth in the company's periodic SEC filings and maybe found in the company's 10-K filing. I am now pleased to turn the call over to Dave Banyard.

Thanks Monica. Good morning, everyone, and thank you for joining us. We’re going to start on Slide 3 with an overview of the third quarter. Turning to the left for the review of our achievements, we generated strong free cash flow in the quarter of $12.7 million or 9.4% of sales, and we continued to have excellent working capital performance at 5.3% of sales. Our Material Handling segment sales increased 2.6% year-over-year, revenues were as expected in all of our key markets with growth coming, in particular, from our industrial and vehicle end markets. Also note that a majority of the vehicle market growth came from the auto and the marine OEM markets. Offsetting that growth was a decline in our RV market which we'll speak to you shortly. Our adjusted operating income increased 18% year-over-year and our adjusted earnings per share were up 50% year-over-year. We continue to improve our balance sheet as we reduced our net debt to $30.2 million which is a ratio of 0.5 times EBITDA. Before we transition to discuss some of the challenges we're facing, I think it's important to reflect on the underlying fundamental performance improvements that we’ve generated in our business over the course of the past few years. We're driving a culture of continuous improvement across our organization, and since we began to focus on our niche market strategies, we generated consistent improvement in several of our key performance metrics including working capital, earnings per share, and free cash flow growth. We continue to believe that strong cash flow generation is most important measure of success, and we’ve been able to achieve steady cash flow growth since 2016. Despite these performance improvements we still have work to do, so let’s move on to our challenges. I’ll start specifically with our distribution segment, which continue to underperform to our expectation during the third quarter. Segment sales declined 6.1% year-over-year and that decline is primarily due to lower equipment sales and lower sales in our international business. As outlined in this morning’s earnings release, we are in the process of implementing a strategic transformation of this business, which incorporates a broader set of actions than we have considered in the past. I will discuss some of these actions in more detail after Matteo’s review of the financials. Moving on to sales to our RV customers in the quarter also declined more than we expected. We’re focusing on a funnel of opportunities here in adjacent markets to try to offset those sales where the rate of decline was higher than expected. On the operating side of the business, we incurred higher cost for maintenance and repair in the quarter. Typically we do the majority of our maintenance work in the third and fourth quarters because of the seasonally lower volume in that period. This year, however, because of the high volume we had in the first half of the year, the equipment needs more repair than we initially anticipated. We also experienced higher R&D expenses as we’re finalizing our new product launch in our Scepter business which will happen at the end of the fourth quarter, at which point we expect this level of spending to slow. Now I’ll turn over to Matteo for a review of the specifics of our financials.

Thanks Dave, and good morning everyone. Today, I will review our third quarter 2018 financial performance as well as our balance sheet and cash flow. So if we turn to Slide 4 of the presentation, we will walk you through an overview of our third quarter 2018 operating performance, and as always all the numbers in the presentation reflect continuing operations. If we start from the top, net sales were $125.2 million, which was roughly flat compared to the third quarter of last year. Increased sales in our industrial and vehicle end market were offset by declines in the consumer or aftermarket and the food and beverage. The adjusted gross profit margin increased 90 basis points to 31.3%, increased price in a favorable product mix were partially offset by higher raw material costs. Additionally, the savings from the 2017 footprint realignment were partially offset by higher than expected factory costs. Adjusted SG&A expenses were $34.3 million during the third quarter of 2018, which was roughly flat compared to the third quarter of last year. At this point, we expect our SG&A expenses in the fourth quarter of 2018 to be approximately $1.5 million higher than they were in the third quarter due to the cost srelated to the execution of the distribution actions that Dave Banyard will discuss shortly. As a result of the higher adjusted gross profit, our adjusted operating income increased 18% to $7.9 million, and adjusted diluted earnings per share were $0.15 compared to $0.10 in the third quarter of last year. During the third quarter, we also recognized the two charges totaling $33.3 million related to the 2015 sale of the Lawn & Garden business. The terms of the sale transaction included promissory notes totaling $20 million that mature in August 2020, and a guarantee for a facility lease that expires in 2025. The carrying value of the notes and the corresponding accrued interest was approximately $23 million and the remaining rent payment under the lease were approximately $14 million as of the end of September 2018. Now during the third quarter the management of the Lawn & Garden business which is now named HC Companies, requested an extension to the maturity of the notes as part of an effort to restructure their debt. And at this point, we believe that there is uncertainty about our ability to collect on the notes and we also estimate that the potential obligation under the lease guarantee will be in the range of $10 million to $14 million. As a result we recognized a non-cash pretax charge of $23 million with respect to the notes, and a pretax charge of $10.3 million for the potential obligation under the lease guarantee. As a result of the pretax charges that I just described, the third quarter 2018 GAAP diluted loss per share was $0.60 compared to GAAP diluted earnings per share of $0.10 in the third quarter of last year. Just as a reminder, the pretax charge of $10.3 million related to the lease guarantee was not included in the GAAP net loss per diluted share range of $0.36 to $0.38 that we disclosed in our October 4 press release. Now, if we turn to Slide 5, I will give you an overview of the performance by business segment starting from Material Handling. Sales in Material Handling increased by 2.6% or 3.2% if we exclude the currency fluctuation. The increase in sales was driven by sales growth in the industrial and vehicle end market. In the vehicle end market, we saw higher sales to the automotive and marine OEM market, increased sales in automotive and marine OEM more than offset the double-digit sales declines in the recreational vehicle. Sales to the consumer market declined mid-single digits year-over-year. As you may recall, we experienced an unusual amount of hurricane volume in the third and fourth quarters of 2017. Finally, the sales to food and beverage also declined year-over-year due to the expected reduced seed box sales compared to the third quarter of last year. Material Handling's adjusted EBITDA increased 8.7% to $17.1 million. The increase was primarily the result of higher pricing and the savings from the 2017 restructuring project, and these benefits were partially offset by the higher than anticipated factory and R&D costs that I mentioned earlier. Moving to distribution, net sales declined by 6.1%. The decline was primarily due to the lower sales of equipment and lower MTS International sales. The lower sales volume was partially offset by gross margin expansion driven by a favorable mix of consumables versus equipment. And as a result, the adjusted EBITDA in the quarter was $2.8 million. If we turn to Slide 6, I will review the balance sheet and the cash flow at the end of the quarter. So as Dave mentioned earlier, we generated strong free cash flow of $12.7 million or 9.4% of sales in the third quarter and year-to-date cash flow at the end of the third quarter was $37.6 million or 8.8% of sales. Through the strong free cash flow generation, we were able to reduce our net debt by $9.5 million during the quarter. And as a result as Dave noted earlier, our net debt to adjusted EBITDA ratio decreased to 0.5. Working capital as a percent of sales in the third quarter was 5.3% which is pretty much consistent with the recent prior quarters. And at the end of the third quarter capital expenditures year-to-date were $3.6 million compared to $5.1 million in the third quarter of 2017. And at this point, we expect that our CapEx in 2018 will be between $6 million and $8 million due primarily to the lower than planned expenditures at our corporate headquarters. With that I’ll turn the call back to Dave who will review our 2018 outlook and the strategic actions and distribution.

Thanks Matteo. Turning to Slide 7, I’m going to review our outlook for the remainder of 2018. As we announced on October 4, we've reduced our expectation for full year sales to be flat to up low single-digits. I’ll go through each of the five macro markets that we participate in and explain to you where we think we will end up for the full year in each of these areas. Starting at the top with consumer, we expect to be up low single-digits. We’re seeing growth in market share in that market and that’s partially offset by the unusual hurricane volume that Matteo referenced from 2017. Similarly in the food and beverage market, we're expecting to be at high single-digits. Year-to-date we're up double-digits but again last year we experienced very strong seed demand in the final quarter of the year and we’re expecting a more normalized demand this year. We still anticipate very good volume, but not quite up to the high level of outsized demand that we saw in last year's fourth quarter. In our vehicle market, we’re expecting the full year to be up mid-single digits. As we’ve highlighted several times already, sales to our RV customers have slowed faster than we had anticipated and we expect that to continue in the fourth quarter. For our industrial market, we expected to be up low single-digits. We had sales increase in the third quarter and we expect the fourth quarter to be roughly flat. In auto aftermarket, we expect to be down mid-to high single-digits as we expect the fourth quarter to be our similar trend to what we've seen year-to-date. Going now to Slide 8, and I’ll spend some time here detailing the strategic actions that we’re taking within the distribution segment. As we progress to the third quarter, we saw a continued decline in sales performance. We realized its going require additional measures to yield the improved results we desire and at the pace we’d like to see them materialize. During the third quarter we conducted the thorough review of the business with a much broader scope than previous efforts and we're now in the processes of executing several measures to transform this business. Continue to further planning and analysis even though some of this work has already begun, but today we can share some insight into the measures already identified and how we expect things to play out over time. The actions we're taking include a strategic pivot in our go-to market strategy, which means moving away from our current single channel to market towards a more of a multi-channel model, which includes things like an enhanced e-commerce platform. We're also going to optimize our logistics and distribution infrastructure to make sure we're serving each of our various go-to market channels as efficiently as possible. Finally, we're implementing a wide variety of cost saving measures including product line and fixed cost rationalization. As said, this work is underway and we're approaching these initiatives with a strong sense of urgency by targeting the fastest achievable results first. I want to highlight and emphasize, this is not a slash and burn or simply just a cost cutting strategy, it’s a growth strategy. The prioritizing areas that we feel we can cut costs and save money up front but the purpose of these actions is to help grow the business profitably. As Matteo stated earlier, we're investing approximately $1.5 million during the fourth quarter on resources to assist us with the planning and implementation of these initiatives. We're planning to execute broad set of actions throughout next year and we expect to start seeing results in our financial performance during the first-half of 2019. We are not ready to share additional specifics at this time but plan to outline further details during our upcoming year-end earnings call. In closing, our third quarter results demonstrated our commitment to driving continuous improvement in our business. We generated year-over-year improvements in cash flow, operating income, working capital, and earnings per share, despite flat sales and continued challenges in the distribution segment. We've established a track record of driving performance improvement in our business, and we're focusing a lot of energy right now in repositioning our distribution segment for similar success. Taking a broad approach to that business to drive results quickly, we're being softer about ways to maximize the long-term opportunity to this segment. We look forward to sharing the updates of our progress on fourth quarter and year-end call. With that, we'll open up the line to questions.

[Operator Instructions] Your first question comes from Tyler Langton with JPMorgan. Your line is open.

I guess with distribution, Dave, I mean I guess there's some of – I guess the issues previously were with sort of turnover in the sales force, and I guess with the move from single-channel to multi-channel, I guess could that still be hampered by the sales force or is it kind of a way to address it? I don't know if you could just give any color there that would be helpful.

Sure. I think the way I would describe it is that we've been going to market through a single-channel, and so what we're doing is starting by segmenting differently and I think that when you - the way we've gone to market, we've been over serving some customers and under serving others, and as we’ve taken a step back and looked at this, re-segmenting will help us balance how we're serving our customers properly. So in reference to your point about the turnover and the sales challenges we've been having, I think a lot of that complexity has masked the fact that we are - that we're not segmenting our business properly on the front end. So, I think it's a combination of things that we hadn’t been seeing. So as we've taken a step back and looked at that, we are going to re-segment the business differently that's going to require that we change how we're structured both on the front-end, as well as on the back end in terms of how we're logistically set up, how we're setting up our cost structure and so forth. So that's why we're saying - it is a broader approach to the business, it's - we're not going to give up on the one channel that we've been going through but we have to change to modify our approach to segment differently to a much broader way of going to market.

Then I guess within Material Handling, I guess you had some volatility sort of both up and down in sales in some of the like larger end markets and products. I guess could you just give us a little more detail on the demand you're seeing now for I guess seed boxes, Scepter, , the RV market, and then for any of those, do you have visibility as you head into 2019 in terms of demand from customers?

Yes, I'm going to defer on the 2019 outlook, we'll come back to you with that at our Q4 review. but what I will say is that I would say that demand level in most of these markets with the exception of RV is normal. And that obviously the second-half of last year and the first quarter of last - of this year in Ag was an outsized, what we thought and have since validated with some pent-up demand from our customers if you look back several years, and I know you haven't been with us for that long, but if you go back several years, there's been a - there was a long period of underperformance or low demand in that particular market and that kind of rebounded in a big way last year. So we see this year for the seed business in particular to be a normalized demand, it's steady and very good, and we're happy with where it is but it's going to be - we had some tough comps both in the fourth quarter and the first quarter. As far as the other markets with the exception of RV, I'd say it's very steady demand in both the consumer and the vehicle spaces and the industrial spaces. In the RV portion, there's excess inventory at the dealers, and we know that, we saw fairly large drop-off which you also see in the industry publications about the OEMs and their shipments. I think this is also a slower time of the year, in particular in the fourth quarter, and the past few years that hasn't been as slow because of the outsized demand in the market itself, but as that market corrects back to itself, you get a bit of the bullwhip effect as a supplier to it and we're experiencing that right now. Yet to see what happens from there, but we sort of expect the fourth quarter to be more of a normal low paced fourth quarter for that particular market.

And just final question on the acquisition strategy, I guess can you talk about what you're seeing is kind of price still the biggest obstacle, and then I guess with the new sort of strategy and focus on costs and distribution, does that sort of make you - is your desire to focus more on that and a little less on acquisitions? Just any thought there would be great.

Sure. I think our long-term strategy holds firm, and we're very interested in acquisition as a path forward for growth for Myers Industries. We are still active in that market. I think you've seen us on the sidelines because of pricing, and we've been active through this year looking at a variety of different things and just haven't found the right one at the right price. And so, we're going to remain disciplined like that. I think our balance sheet is very strong right now, which gives us a nice position to be in as an acquirer. Certainly, we want to dedicate our attention to the distribution segment as highlighted in our press release, it's our top priority right now. We expect to move through that and get back to our long-term focus. So, I guess the answer is both, but as I highlighted, distribution is our top priority at the moment, and once we get that business where we want it to be and on track to where we want it to be, we will be active again.

[Operator Instructions] Your next question comes from Ryan Mills with KeyBanc Capital Markets. Your line is open.

Yes, my first question just in distribution, you're talking about more e-commerce focus channel, with the industrial distributors I cover they said is more millennials into the work force they find the e-commerce being a growing preference. Have you talked to your customers in distribution is that the same thing is that the reason why you guys are switching to more of a focus on this route? Just any color you could give on the preference in purchasing habits for your customers and distribution.

Sure. I think it's a combination of different things, Ryan. So, yes there is a bias to have different tools to buy and e-commerce comes in a variety of different flavors and we're addressing at in a wide variety. So in other words it's not just having a website to buy from which we have today, it's having more advanced tools on that site for - that are tailored to perhaps larger customers that want to buy in a more automated fashion and so forth. So there are a wide variety of ways to change e-commerce, that's really one portion of what we're changing. I think that as I said earlier, we've been going to market with one method forever and the market has changed and so we now have to rapidly change to address that. And what I mean by that is, we've been serving the customer the same way with single sales person visiting storefronts and so forth. There are multiple other ways to address customer needs right now that have, for example, certain customer types have consolidated, certain customers have changed the way they want to buy in terms of the quantities and the methods of delivery and so forth. And our structure is set up so that - it's setup for that single sales person point of approach, and so we have to change both the frontend as well as the backend to address that. E-commerce is a part of that making sure that not only does the e-commerce system works but it's connected properly to our distribution network and operations if you will. So, and really all that boils down to a cost to serve. So if you have a heavy touch in the market that increases your cost to serve that you have too many products, it increases your cost to serve. So we’re addressing all of these things so that there - address some of the customers that want to keep our model versus the higher touch model we’ve been using.

And then I just want to talk about pricing and inflation related to tariffs. Have you guys disclosed before your exposure to - your COGS exposure to China in both segments?

Yes, so on the Q2 earnings call we outlined the exposure of what we think how the tariffs will impact us. We think that it works those are about 1.5% of material costs due to things that are under the tariff regimen about three quarters of that is steel. We've already seen that price increase and have absorbed it and passed it on in price. Remaining 25% are purchased items and that’s primarily in our distribution segment. We are either alternate sourcing or pushing price through on those types of situations. So, and as you can imagine as part of this work that we’re doing the actions that we’re taking and some of the further actions we’re contemplating involve how we source as well so that we see opportunities for additional cost reductions in our supply chain.

And my last question in the press release you talked about a new product launch in your consumer end market as this token maybe provide a little bit more color around that?

Sure, this is a product that we’re very excited about in our consumer market. It’s coming to market this quarter. We are producing product today and we’re very excited about the breakthrough that we think this brings to the market for in both ease-of-use, as well as just better product than what we had in the past. So look for that product coming to your large retailers later this winter and we’ll have more detail on that when it’s officially launched and we’re on track for launching that this winter.

[Operator Instructions] And we do not have any questions at this time. Ms. Vinay, I'm going to turn the call over to you.

We 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 within approximately 24 hours. A replay will immediately be available via webcast or call. Details can be found on our website under the Investor Relations tab. Thank you and have a great day.

This concludes today's conference call. You may now disconnect.