Good morning or good afternoon all, and welcome to the Myers Industries 2021 Second Quarter Earnings Call. My name is Adam, and I will be your operator today. [Operator Instructions] I will now hand you over to Monica Vinay. Monica, please go ahead when you are ready.

Thank you. Good morning. Thank you for joining us. I am Monica Vinay, Vice President of Investor Relations and Treasurer at Myers Industries. Joining me today are Mike McGaugh, President and Chief Executive Officer; and Sonal Robinson, Executive Vice President and Chief Financial Officer. Earlier this morning, we issued a news release outlining the financial results for the second quarter of 2021. If you have not yet received cast on our website and will be archived along with the transcript of the call shortly after this event. Before I turn the call over to Mike, I would like to remind you that we may make some forward-looking statements during 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 am now pleased to turn the call over to Mike McGaugh.

Thank you, Monica. Good morning, everyone, and welcome to our second quarter 2021 earnings call. I am pleased to share that we had another quarter of strong sales growth and continue to make good progress in advancing our long-term vision. I would like to thank all of our Myers teammates for navigating what's proven to be an uncertain and the dynamic environment and for remaining laser-focused on meeting the needs of our customers, reliably delivering our products and living our values every day. The second quarter was defined by continued recovery across our key end markets and strong operational execution in a challenging environment. On top of that, earlier this week, we announced the acquisition of Trilogy Plastics, which marks our second acquisition in the last 9 months and another proof point in the execution of Horizon 1 of our long-term strategy. The acquisition of Trilogy continue to grow our rotational molding platform, and we have included a slide in the appendix of our slide deck today with more background for you. I will review Trilogy and provide some additional updates on our strategy in my closing remarks. But for now, please turn to Slide #3 for an overview of our second quarter results. Continued strong demand across our Material Handling and Distribution segments drove a 58% year-over-year growth in sales, and we delivered a second consecutive quarter of year-over-year revenue growth in excess of 20% on an organic basis, with all end markets supplying solid growth. Demand from our customers is strong and looks to continue. We have the leading market share of high-quality, well-regarded products, and we have seen that the demand for these products is durable and lasting, even in a pandemic. I am pleased with our niche market focus and approach. It provides us a solid…

Thank you, Mike, and good morning, everyone. Let us begin with a review of our second quarter financial results on Slide 4. Net sales were up $69 million, an increase of 58%. Excluding the impact of the Elkhart acquisition, organic net sales increased 26% due primarily to higher volume mix. Favorable price contributed 5% and FX 1%. Sales increased in both our Material Handling and Distribution segments in all key end markets. Adjusted gross profit was up $12.5 million, while gross margin decreased from 36% in the prior year to 29.4% in the quarter. Margin was negatively impacted by higher raw material costs, primarily resin, which continued to increase sequentially during the quarter. These costs were not fully offset by higher prices, which led to an unfavorable price to cost relationship. Adjusted operating income increased $2.80 million to $15.1 million. The increase in gross profit was mostly offset by higher SG&A expenses, driven by the addition of Elkhart, higher salaries and incentive compensation costs and higher legal fees. Adjusted EBITDA was $20.5 million, an increase of $2.4 million compared to the prior year, and adjusted EBITDA margin was 10.9%. And lastly, adjusted EPS was $0.29, an increase of $0.06 or 26% compared to the prior year. Turning now to Slide 5 for an overview of segment performance. Beginning with material handling, net sales increased $56 million or 70%, including the Elkhart acquisition. On an organic basis, material handling net sales increased 24% due to strong volume mix. We gained an additional 6% due to favorable price and 2% in FX. Material handling adjusted operating income increased approximately 8% to $17 million, driven by higher volume mix and the addition of Elkhart, which were partially offset by an unfavorable price to cost relationship due to escalating raw material costs and higher…

Thank you, Sonal. I appreciate it. Now please turn to Slide 8. I introduced our long-term road map in October of last year. In a short period of time, we have made meaningful progress against the current phase of this road map Horizon 1 and our transformation of Myers is well underway. We have a shareholder focused, value-creating vision for our company. I believe we have the right team in place with the right strategic plan and the right focus on execution to make it a reality. We are off to a strong start, and we continue to execute against our goal of transforming our Material Handling segment into a high-growth business that's a true innovator of engineered plastic solutions, while we also continue to grow and optimize our Distribution segment. Horizon 1 of our strategy is rooted in the execution of 3 areas: #1, self-help initiatives, which includes improvements in purchasing, value-based pricing and SG&A optimization. #2, organic growth fueled by sales and commercial excellence, and one important component of which is to build out our e-commerce channel. And #3, bolt-on M&A to build out our existing businesses. Continued execution across these 3 elements will propel us into Horizon 2, where we plan to use our cash flow and knowledge gained from Horizon 1 to pursue enterprise level M&A in North America. The focus on Horizon 3 will be to pursue enterprise level M&A on a global scale. This vision and roadmap is supported by our 4 strategic pillars outlined in Slide 9. Because I have described each pillar in detail on previous calls, I will move to Slide 10 and give an update on the recent progress we have made with respect to each. On the organic growth front, we continue to make headway in implementing our improved…

[Operator Instructions] Our first question today is Steve Barger from KeyBanc.

You have been aggressive on price. You are still behind on price costs. The first question is, have the price increases had any impact on demand? Or can you just talk about end market dynamics as you see them?

Yes. Steve, at this point, no. At this point, no, there's an acceptance in the market-based upon the inflation you are seeing in all raw materials. We still feel we have got good success in implementing the recently announced July and August increases. We are not seeing demand tail off in a market way. There are certain -- there may be certain submarkets where you may have some positives. But generally speaking, no, we are not seeing it impact demand at this point.

And you said you expect the supply chain disruptions are temporary. What's the thought process there? Or what are you hearing from suppliers and any way to handicap when those prices might start to roll off?

Yes. So a lot of it is on the polyethylene, polypropylene side, but also steel, to a lesser degree. The polyethylene side and polypropylene side, a number of those factors came into play. We had COVID and the pandemic, which pushed out maintenance turnarounds. When those maintenance turnarounds were to be done, we had to freeze the spring, which threw out over 20 force majeures. That was a unique circumstances of events that since has pushed out more maintenance turnarounds into the second and third quarter. We think that it will ultimately stabilize and revert over the course of the next month. But we don't have a crystal ball. It's tough to read that one. So Sonal's information, we expect price to cost to gain ground in fourth quarter favorably is accurate.

What percentage of the product line has contracts where you can't push price right now until contract renewal?

Yes, at this point, we have not disclosed that in the past. And so I would prefer not to disclose that at this time, Steve.

Okay. Well, do you have any product lines right now that are breakeven or unprofitable? Or is everything still contributing?

At this point, I don't want to go into the specifics. I would say there's significant demand. That's the positive. The short-term disruptions from a price standpoint on polyethylene, polypropylene have been significant. We are addressing that with the price increases. The vast majority of our product lines continue to contribute. However, we need to get that more healthy. I mean, you can see that in our EBITDA second quarter versus second quarter. We need to mean revert, Steve.

Yes, I understand. It's an unusual situation. And last question for me, and this is -- I know it's a tough one. But first half over first half sales are up more than $120 million, but operating income is up $3 million. And I know that a huge driver of that is the input cost inflation that you are talking about. But what did you expect to see? Or what should be the normalized operating leverage from a combination of organic growth and acquisitions?

Yes. Sonal, do you like to take that?

Sure, Steve. So Steve, I would start with what you saw in terms of our gross margin compression in this quarter. So we were down 660 basis points. As you think about our commentary around being unfavorable from a price to cost relationship, about 2/3 of that was due to this relationship of the compression. So as you look out when some of this starts to turn, we would expect to regain much of this margin compression that we have seen.

Yes. Yes. That's right. That's right. And there's incremental on labor, labor shortages, labor scarcity, I think the labor scarcity is going to be a headwind for the next quarters. That's hitting everyone. You're covering it on premium labor expense, but also as a lot of the supplemental unemployment insurance falls off. Barring a curveball from COVID, we expect a good bit of that to be remedied. We are also taking proactive actions on staffing solution, employee development, employee investment, employee training, and I feel confident that we are closing that gap, Steve, but the labor scarcity and labor cost has also been a headwind.

Our next question is from [Jonathan Natera] from Cowen.

This is Jonathan on for Lance. Congratulations on the quarter. My first question is with material handling increasing 32% organically, can one also assume that organic sales volumes increase? Or was it just a function of increase in price?

No. Jonathan, this is Sonal. So yes, of that 32%, approximately 24% of that was volume mix. And so that was driven by good solid growth there on that side, 6% then from pricing and then about 2% from FX.

Okay. Got it. Now I know that you guys have raised prices in 3 months this year. And you are still not able to catch up the cost. Eventually, I am sure you will. Once you guys do reach that point where prices do catch up, do you see that as a potential. One, do you think prices are -- remain sticky? And 2, do you see them as a potential tailwind for if it's in Q4 and then the remainder of '22? Or how do you guys view that?

Yes, Jonathan, this is Mike. So it kind of goes back to some of my comments. We make high quality, highly reliable products that we continue to invest in. And based on that, we believe that we can price our products to the value they create for our customers. And I mentioned we want to approach this in a -- with a long-term mindset in a fair way with our customers. On the same token, we want to price the value and not price opposite cost. Those are one of the initiatives I have talked about in the past. That's one of the initiatives we have at Myers. It's underway. It's focused on value-based pricing. I don't know if that answers your question. I can give more specific there, I could try to.

No, it's helpful. My last question, I noted that financial leases have become a portion of the balance sheet. And I am wondering, is this something that will remain like the status quo going forward? Or were the leases of opportunities that came up and you have decided to take those?

Yes, Jonathan. No, it's really not a structural change in how we think about our capital structure and how we will proceed going forward. It really was an opportunity as we took a look at the project fund plan that we had announced and the opportunity to essentially sell it and lease it back as we went through that process.

[Operator Instructions] We have a follow-up from Steve Barger.

Mike, in the past, you've said that Myers is one of the only companies that can bring the 4 plastic molding technologies to market. Can you talk about how that's translated into new product wins in the marketplace? Or how customers have responded to those broader capabilities?

Yes, it's early days, Steve, but we're seeing proof points, we're seeing that playout. We have done cross training. And I can't remember what I have mentioned on prior calls or not. For example, we had our rotational molding sales and technical growth in our blow molding plants because there's the most overlap there and vice versa so that they understand what our capabilities are as a company, what does a good order look like in terms of price, volume, run rate, et cetera, on the blow molding and the roto molding side, we are seeing most of the cross-selling occurring there. Specific -- what's the revenue from that? At this point, single-digit millions of dollars. That's one of the hypothesis of our approach on the 4 plastic molding technologies. It's bearing out. It's playing out. What's interesting, however, we have a new leader leading the distribution platform. And that -- the results of that business are pleasing to me and to the team. We are also seeing some initial cross-selling opportunities even in distribution of the plastic products we make, as an example, the Conbon Bin that are in Akro mills. Some of the storage containers that are made over in Buckhorn. Just raising the awareness of that 130 sales person sales team about the products we make and how they could move them even though those segments previously, Steve, have been bifurcated. So that we are seeing more volume on the One Myers approach. Quite frankly, I would like to also we seeing more price, but we are getting there. We are getting there. We are selling a lot of -- we are moving a lot through our P&L. We just need to see the pricing hit in a more pronounced way. And so that we actually hold back more that's on the bottom line.

On the last call, you said the sales training was a 30-day process, I think, and it was about 1/3 done. So assuming that's now complete, is -- well, I guess that's the question. Is that complete through the organization on both sides?

Yes. And maybe I misspoke before, it's more almost like a 90-day process, Steve. We have the waves that are going through. The distribution team, we are training the management, but not all 150. But of the other 60 or 70 sales people we have on the material handling side, I believe it's largely done or very soon will be. And that's part of why we are seeing a lot of success. Our salespeople are even more focused on customer needs, customer need identification, creating value for our customers, and we are seeing that drive some of the volume in addition to the recovery of the end markets. Now, quite frankly, our focus is making sure we get all the volume out of our assets. We are running our assets pretty hard with not enough bodies to fill the roles. I mean, we have got 20%, 30% more volume and you may be down 10% or 15% bodies to run those plants. And so we have mandatory overtime as an example. We will work -- our people are working really hard to keep up with demand. It's -- that's been a headwind. It's the labor scarcity. That's probably been one of the limiters.

Is there any way to mitigate that? Is it a function of -- as you think longer term, do you need to move the location of some of these facilities to a more populated area? Or how do you think -- or is it an automation play? What do you do?

Yes. It's an automation play. That's a little bit longer-term answer. We have some automation consultants at each of our facilities that are helping us identify opportunities. And a lot of them are not huge capital expenses, but more in the incremental. So that's in play. Also, we have got a number of pilots, some of which are really bearing fruit on either tapping seasonal or migrate workforces that can come up and contribute immediately. In that instance, there's a bit of a language barrier you got to work through, but I'll tell, Steve, it's something -- an innovative solution some of our HR leaders have come up with that we're really early success. And quite frankly in my past life in the framing business and construction business that was a very common practice to bring up H2B visa workers. And we're looking at how we replicate that here. It's bearing fruit that's why I said it I think that gap is going to continue to close as the unemployment supplement falls off and as we implement some of these creative solutions on additional staffing. Also at the same token the employee development and the LMS system. And then quite frankly we're going to -- we've had to raise our hourly rates. So that's 1 of the other issues, but I believe it's under control and I believe we're performing well in that space, but look first half of this year and for the near-term it will be a headwind labor availability and then using that labor to run our plants.

Yes. Last one for me, I know it's small but any update on e-commerce? I know that has -- it's an exciting new channel that could grow.

It's very exciting. We have got a good team. I am really pleased with the folks that Chad Collins has been able to put in place. They are very talented. We use it as a flywheel. The margins in some -- for some customers and channels are actually very good, some not as good. And at this point, right now, our plants are running so hard. We have actually had to throttle it a little bit because we can't get the volume out of the door. That's a good problem to have, but that e-commerce channel is really bearing fruit. And I think it's going to be a secret to our success in the future.

[Operator Instructions] As we have no further questions, I will hand back to the management team for any closing remarks.

Thank you. Thanks everyone for your time and participation today. We appreciate your interest in Myers Industries. Have a great day. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.