Hello. Good morning, and welcome to the Myers Industries 2021 Third Quarter Earnings Call. My name is Gemma, and I'll be the operator today [Operator Instructions]. I will now hand you over to our host, Monica Vinay. Please go ahead, Monica. Thank you.

Thank you. Good morning. Thank you for joining us. I'm 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 third quarter of 2021. If you've not yet received a copy of the release, you can access it on our website at www.myersindustries.com, it's under the Investor Relations tab. This call is also being webcast 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, and good morning, everyone. Welcome to our third quarter 2021 earnings call. We continued our growth trajectory during the quarter, and we made further progress on our long-term strategy despite a difficult macro environment that's impacting many businesses around the world. I'd like to thank the Myers team for their commitment and dedication that made our success this quarter possible. With that said, please turn to Slide 3 for an overview of our third quarter results. During the quarter, we saw continued strong demand from our material handling and distribution customers. This demand, combined with meaningful contributions from our recent acquisitions, drove the company to $200 million in net sales and more than 50% revenue growth for a second consecutive quarter. The company's top line was the strongest it has been in many years. On organic basis, sales grew 20% compared to the prior year period which marks 3 consecutive quarters of 20% or more organic growth. We are beginning to see the benefit of our investments in our sales force and sales training and an improved commercial focus across the company. While our top line performance was strong, we did see macroeconomic headwinds again this quarter, which impacted our margins. Input costs climbed higher due to increasing raw material costs, and tightness in the labor market impacted labor costs, both of these drove margin compression during the period. The negative impacts of labor were due to overtime pay, higher wages and in some cases, the lack of labor, which inhibited us from making or shipping certain orders. While we believe inflationary labor and supply chain headwinds will likely persist for the next several quarters, we are taking numerous actions to mitigate possible impacts on our business. These proactive steps include improvements in our sales and operations…

Thank you, Mike, and good morning, everyone. Let's begin with a review of our third quarter financial results on Slide 4. Net sales were up $68 million, an increase of 51%. Excluding the impact of the Elkhart and Trilogy acquisitions, organic net sales increased 20% driven by price, which contributed 13%. Higher volume mix contributed 7%. Sales increased in all key end markets in both Materials Handling and Distribution Segments. Adjusted gross profit increased $7.2 million, while gross margin decreased from 35.6% in the prior year to 27.2% in the third quarter. Gross margin was negatively impacted by higher raw material costs and higher labor costs which were not fully offset by pricing actions, has led to an unfavorable price-to-cost relationship. Included in cost of sales was a $1.6 million increase related to the LIFO inventory reserve. Adjusted operating income decreased $3.1 million to $12.5 million due to increased SG&A, driven by the addition of Elkhart and Trilogy along with higher compensation cost and higher professional fees. Adjusted SG&A as a percentage of sales decreased to 20.9% in the third quarter compared to 23.8% in the prior year as we are experiencing the benefits of our overall larger scale on our infrastructure. We're pleased with the investments we are making in support of our One Myers work strategy are yielding positive results. Adjusted EBITDA was $17.3 million, a decrease of $2.3 million compared to the prior year. Adjusted EBITDA margin was 8.6%. And lastly, adjusted EPS was $0.23, a decrease of $0.07 or 23% compared to the prior year. Turning now to Slide 5 for an overview of segment performance for the quarter. Beginning with Material Handling, net sales increased $63 million or 73%, including the Elkhart and Trilogy acquisition. On an organic basis, Material Handling net sales increased 26%,…

Thanks, Sonal. Starting on Slide 8. It's been a little more than a year since I first introduced our long-term road map and broader One Myers strategy. I'm very proud of the considerable progress we've made to date. I have a lot of passion for this company, our company, I see the upside and the opportunity every day. We're currently well into the middle innings on Horizon 1 of our transformation. As a company, we are aligned and centered on our true north, our mission, which is to transform our Material Handling Segment into a high-growth business as the true innovator of engineered plastic solutions while we also continue to grow and optimize our Distribution Segment. As I outlined in the past, Horizon 1 is built on driving self-help initiatives to improve profitability and then using these proceeds to fund organic growth through sales and commercial excellence and bolt-on programmatic M&A. We've made meaningful progress across each of these areas. As we continue to execute the remainder of Horizon 1, we'll have the necessary foundation, knowledge and track record to move into Horizon 2. We will continue with the self-help and organic growth efforts, but will use the enterprise level M&A to create shareholder value. After the completion of Horizon 2, we will transition into Horizon 3, where we approach M&A on more of a global scale. Our One Myers vision and the associated transformation of our business is rooted in our ultimate goal of maximizing long-term value creation for our shareholders, we believe, will be achieved as we execute on this plan. Slide 9 covers the 4 strategic pillars that support our One Myers vision. My approach is to be consistent, almost broadly consistent on the pillars and on the levers and the areas of focus we're using to…

Thank you for your patience, ladies and gentlemen. We have lost connection with our speakers. We will be with you in just a second. Thank you. Thank you for your patience, ladies and gentlemen. We now have the team back on the line. I will hand back over to Mike McGaugh. Thank you.

Thanks, Gemma. I appreciate it. Sorry about that, folks. I'll get back to my prepared remarks. And I'm not exactly sure where it dropped, but I'll pick up around e-commerce. So that's a great place, a great thing. So additionally, our investments in e-commerce continue to take flight. E-commerce is showing encouraging results with year-to-date sales up approximately 30%. We've learned to use e-commerce as a flywheel for volume and found that it's an excellent channel. We're able to accept to define business that helps us best optimize our asset capabilities. This flywheel approach will become more impactful as we get better at S&OP and improve how we balance our growing demand across our facilities. Moving on to M&A. Growth via acquisition is and will continue to be an integral part of our One Myers strategy. We closed on our acquisition of Trilogy Plastics earlier this quarter and are very excited about its prospects. Trilogy enhances our ability to manufacture highly engineered and tight tolerance specialty products. We're already taking some of the learnings and best practices from Trilogy into our plants that were legacy Ameri-Kart or Elkhart Plastics. So far, 3 months end, the integration of Trilogy is going well and is right in line with our expectations. And as a reminder, the integration of Elkhart has also gone well, helping us better serve our customers and capture growth synergies and $4 million to $6 million of cost synergies, both of which exceeded our expectations. From a big picture perspective, through our 2 acquisitions over the last year, we're making progress on developing an effective framework for selecting high-quality companies. They complement our business and is equally important, we are on our way to developing a strong repeatable playbook and processes to ensure integration -- successful integration of these…

[Operator Instructions] Our first question today comes in from Steve Barger of KeyBanc Capital Markets.

I'll start with some modeling stuff and then get into some bigger picture things. First, just distribution sales came in at $50 million for 2Q and 3Q. Is that how we should think about it for 4Q? Or is there a seasonal variance that we should model?

Steve, I'll have Sonal hit the modeling questions, if that works for you.

In terms of how you've seen that trend throughout the year, I would say that's still a relatively good projection as we wrap up the year. They're going to have some additional benefits of pricing continue to benefit them in Q4 as well as volume growth as well. So yes.

And then a similar question for Material Handling. Just given the revenue range that you've put out for the year, it looks like there could be a little step down sequentially in revenue. Do you expect that due to seasonality? Or how should I think about that segment?

So you may recall that we will lap 1.5 months due to the Elkhart acquisition from last year. So there's a little bit of that year-over-year growth that won't be available in terms of the year-over-year growth number. In terms of absolute number, volume, the way I would think about the modeling on this is acquisitions as you think about Q4 and how you're going to kind of come in, in your range. Acquisitions, we think will still contribute about half of that growth on a top line standpoint. And then as you think about -- and this is for the total company, as you think about pricing, we'll continue to see additional benefit of pricing as we go through Q4, similar to what we saw in Q3 and then similar volume growth.

And Material Handling operating income was down in 3Q year-over-year despite the 73% increase in sales. Can we expect operating income to be up sequentially as pricing actions or anything else flows through?

Given the fact that we're expecting price to cost to turn favorable, we would expect to see that starting to turn.

So all that kind of comes to -- down to the 4Q guidance, it's a pretty big range. There's maybe 8 weeks left to the year, just given revenue trends, mix, costs, are you leaning to the higher end or the lower end?

Steve, we're not commenting on what part of the range we'll land in. Clearly, there's still a number of different variables that will impact that guidance range. Price mix, obviously, is one. We expect resin to continue to ease and decline. And so expecting some benefits out of that. But yet to be seen as we continue throughout the quarter. We've taken additional pricing actions which we know will continue to benefit us as well. So there are a number of moving parts. And for now, we'll leave it at we've got a range out there that takes those factors into account.

Well, you did say that you expect cash flow trends to normalize in 4Q. Can you tell us specifically what you expect for operating cash flow in the quarter?

We're not guiding to a specific number there, Steve. What we're trying to imply there is as you look at working capital as a percentage of our net sales, clearly, that's elevated at the end of Q3. We expect that to start coming back down as you saw, typically, we've been in that 10%, 11%, 11.5% range. So we expect that to start trending back down but we have not guided to a specific number there.

Steve, what we'd tell you is, look, it's an important priority. It's an important priority for the company. We made some decisions in the third quarter to help our service levels. it's also the -- it's right inventories in place to be sure we have the raw materials and also the finished goods to fuel that growth. I won't give you a particular guidance on the cash flow and say that it's a very important priority here.

Well, as Sonal pointed out -- I was just going to say you had pointed out that free cash flow is basically flat for the year. Fair to say that we'll see a pretty big swing in 4Q?

So Steve, as we look at the 3 buckets of working capital, we would expect each one of them to contribute to that working capital benefit in Q4. And so yes, we expect free cash flow to be favorable in Q4, and we'll continue to see how that plays out as we go through the year.

I'm going to keep going. If there's somebody else in the line, just let me know, and I'll be happy to jump out and come back. This is the third quarter in a row of 50% sales growth with no real incremental EBIT contribution. And we know why it's inflationary pressures. But is -- EBIT will be up year-over-year due to the easy comp, I would guess. But should we think that 1Q looks similar to the last few quarters in terms of revenue and EBIT coming in, in that low to mid-double-digit range little middle-digit millions?

Do you mean 4Q, Steve?

I'm actually talking about the first part of next year. I just -- as I think about the inflationary pressures, the sales growth year-over-year and just kind of how you're converting. I'm curious when we start to see that inflection? Or if I should model 1Q to look more like what 2Q, 3Q and 4Q are likely to look like?

So Steve, this is Sonal. We have not obviously provided any sort of outlook for 2022 yet. I guess a couple of things to keep in mind big picture is we continue to take pricing actions. We know those pricing actions will continue to provide benefit as we continue to go through Q4 and as we look at it at next year. Clearly, we're keeping an eye on the cost side of the equation on resin and what it continues to do. And then demand, as you've seen, we started the year off very strong from an organic standpoint as we lap some of the impact of COVID last year. You saw volume come in, volume mix come in at about 7% this quarter. We continue to expect trends in that same range as we end out this year. And so we'll continue to see some benefit of that. But our teams are working on that as we go through that process.

Yes, Steve, just on the polyethylene side, what you're seeing is inventories are starting to build. You're seeing some of the -- whatever index you look at polyethylene is beginning to soften a bit as those inventories build. I think that will carry -- that's the one thing that will be different in 1Q versus 2Q or 3Q is the inventory balances and what that resulting does on the indices and on cost. Steel, still pretty high. Polypropylene is still high-ish but polyethylene started to relax a little bit. We took a constructive approach with our customers to be sure we had high service levels and that we also came to some, I would say, collaborative or constructive agreements on price. We're not a commodity company. We're more of a specialty company, an engineered products company. So just as we didn't aggressively ramp prices up, I think also we're going to have some stickiness as some of the raw materials fall.

So you would expect that even in a somewhat inflationary environment next year, you can get back to driving margin expansion on what has been pretty significant revenue growth.

Yes.

And going back to the retreat, you mentioned, Mike, can you tell us what some of the short-term goals are? Just as -- the long-term goals, I'm presuming, are aligning with the 3 horizons. But what do you see as near-term priorities?

It's really the pieces outlined on the self-help, the supply chain, S&OP, that excellence the pricing team, getting that team geared up and getting those -- getting that team to be able to have more of a positive impact. Balancing service level with inventory, I mean that's a delicate balance. What I'll say is it really is outlined in that strategy is the self-help piece, ensuring we have a good and thorough well-thought-out loaded bolt-on pipeline on the acquisition side and we do, ensuring that we're continuing to feed e-commerce and that we don't make short-term decisions and curtail that. That's going to be a big value generator for us. Particularly as the flywheel as we optimize our assets and then just all the commercial work we're doing, I mean we are remaking the company in terms of sales, product management, marketing, market management, we're bringing in a level of excellence here and being sure that we don't short shrift that, but cash flow wasn't what we wanted it to be in third quarter, but this is a long-term game. And we need to continue to invest in the SG&A, invest in CapEx. That S&OP, the demand modeling, Steve, the supply model and getting that into play, I think it's going to unleash additional capacity even out of our current asset footprint. And then 1 thing we haven't done as much before what we're going to do now is looking at our assets as a grid and really optimizing what products we make on which assets how we get to a 24/7 run schedule and then how do we manage that across the United States. And that's becoming more relevant with our roto footprint now that we've got almost a nationwide footprint, and we hope to continue to build that. So it's just 3 hours in a cloud of dust execution. I will say a lot of the discussion was more around Horizon 2 plus Horizon 3, but more on how do we prepare ourselves to get ready for Horizon 2, recognizing that, that may be honest, maybe a little bit sooner.

I just had to pick some of that apart, that was a great answer. Just to ask directly on the goal of hitting $1 billion in run rate revenue by the end of '23. Are we still on track? Because if I just assume organic growth moderates to more normal levels, you'll need to add maybe another $150 million-or-so in revenue depending on timing.

It's on track. We said our run rate by the end of '23, Steve, that's -- I'll stand by that.

And has any of that grid work been done? Have you moved product lines to lower-cost facilities or more geographically advantageous places? Or is that still all yet to happen?

On some of our injection molding assets, we're getting better at that. On the roto side, there's a lot of untapped potential there. We've brought in and are bringing in some I would call it professional product managers, product management, that mindset, that asset management mindset. That's ramping, Steve. On the Roto side, where there's the most optimization from a grid standpoint, for I'd say we're in inning number one of a 9-inning ballgame.

And can we talk about pricing for just a second? You said you have a new pricing team in place. What are they focused on first? Is it specific product lines or products that are most negative in terms of price cost? And just how are they determining value to the customer for value-based pricing?

So we've got an extensive approach on building out our market plans. And these are very robust 20-page plans to do a value chain analysis, figure out who has the right power in that value chain, figuring out where we fit and then what opportunities do we have to capture more value for our shareholders. So it's the market planning process, it's the account planning process, the pricing team themselves, a lot of this tail analysis. There's a lot of tail analysis that needs to be done. A lot of it is also getting to a consistent contract framework. How we do our quotes and contracts and ensuring that we have more flexibility going forward to make more rapid adjustment than maybe what we had in the past. So the leader we brought in was from a prominent chemical and plastics company. I've worked with him quite some time. He's very good, and he's brought in a couple of analysts to help them I think clean enough to tail, clean up quotes of contracts and then moving to this value-based mindset. And like I called out in my comments, that may be a year journey or a year or 2 journey. As we're moving away from being a contract manufacturer in a toller to being more of a value-added specialty provider. That's really who we are. And it's just having some of those discussions with some of our key channel partners to get to that point. But it's moving. So that's, in my opinion, that's a very significant value creation lever for the company.

And I know that ultimately, the intent is to be an innovator of engineered plastic solutions. Have you rolled out any new products based on your updated capabilities? Or what do you have on the drawing board that you think can drive some revenue in the next year or 2?

Yes, there's some incremental extensions on the roto side. I mean we really found a lot of neat technology with Trilogy more than we expected. Some of the processes and how they go about making the products, they were pretty -- they were a pretty tight engineering-based company. Rolling that over into some of the Elkhart and Ameri-kart assets and customer bases. We picked up some proprietary programs with some big name consumer and even aerospace companies that it's been intriguing. And again, a lot of that's been on the engineering side on roto. On the blow molding side, again, it's continued line extension in the portal fuel containers. We've got some innovation there that we've not yet announced some other incremental innovation and then also rolling out into the military segment on the blow molding side, so we're not as dependent upon portable fuel containers. And that's a good business for the next years. Look, it probably has some headwinds longer term. So how do we take the cash flow from that business, the talent of that team in diversified bid? And so that's really more into the military space. There's a longer sales cycle there for sure. But we can make quality products to tight specs and we're building that piece out. So lot of it's line extension. We're trying not to do big bangs. I really don't want to do moonshots. You don't need moonshots and plastics molding, but there's innovation there. I'd even say Boy, Steve, I would put e-commerce as a piece of that inhibition. The mindset on that channel has dramatically changed in Myers and that's helping the Distribution business. There's a lot of room to run on taking that Distribution business into more of an online inside sales approach. Similarly, there's more and more consumers want to research products and buy online and buy through these e-commerce channels. And I just think there's a lot there. Look, you got start-up costs right now. So we're investing in at this point. And we're seeing some proceeds through more volume, but I really think you've got 3, 4, 5 years of investment in e-commerce, if you really want to be a player.

Well, I guess, to that point on expanding the channel. Last quarter, I asked about demand destruction from aggressive pricing and the answer was no. I'll just ask that again. Any negative demand response?

I mean, really, the issue has been just get this product. I mean a lot of these end markets are strong and growing. On some of the products and injection, some of more expensive products there's a few customers that will push back and through negotiation, manage the order flow to try and give them a little bit of an incremental advantage on negotiations. But generally speaking, there's a lot of demand for the products that we make. My compliment to the legacy teams here, they got us in the right niches. We have good brands. We have quality products. We just need to get bigger.

I'll just ask two more. And I do appreciate all the time. Last quarter, you said the automation strategy was an important part of helping with the labor situation, and you've got -- it sounds like automation consultants in the plants. What have you learned or implemented over the last 90 days, and what can we expect in 2022 from -- on the automation front?

Same thing there. Again, it's early innings in our different plants in the blow molding side, the injection molding side. Blow molding has got a number of opportunities where you can put robots in place. And we're really not displacing jobs. What we're doing is we are filling work that needs to be done where we cannot get workers. And so that's been a big constraint for us. So there's incremental automation going in place in the blow molding plants. Plans for automation on the injection molding plants, but we need to do more there. And then roto as well as we're really trying to look at a few of these businesses, i.e., Trilogy has a bit of a petri dish. And can we test or can we piloted some automation approaches in the roto business, my mindset, our mindset is we want to be innovators. We want to take some smart risks and go partner up with some of these innovative roto molding companies that can take 2 or 3 laborers off of a machine and you're taking your labor down by 50%. Again, very early innings, very early innings, but I think that's just going to be a sustained theme over the next 5 to 10 years, it has to be. It's just not enough labor to what we need.

And last question, you said paying a fair price for M&A, not overpaying is critical for success. How are you determining fair price on these acquisitions? Is it based on how you see revenue synergies or on return on capital based on current EBIT? Or just what's your process?

What we look at is we just go back to an EBITDA multiple, we look at return on capital. What I find typically is we want to invest and grow these businesses. And for a lot of these founder-owned businesses, where this is their legacy, and this is their life's work, they want to transfer this to an owner that has the same value. Values as them and we'll invest in capital, invest in their people and grow it and not cut it and not go through and have more of an aggressive approach. Most of the time, it's a little bit backwards, there's a strategic -- my argument is I will buy these businesses, we will invest in them. We will nurture and grow the management teams. We're not going to cut them and cut SG&A because this is a growth story. But because of that, I may not be able to pay -- I may only be able to pay a turn or 2 less than private equity. And for the right buyers, you really care about the right sellers who care about their legacy and care about their work family, it resonates. And so we take a more gentle approach on cost synergies. Now a lot of the cost synergies, Steve, come through raw materials, a little bit of footprint consolidation, a little bit of attrition. But a lot of it comes to raw materials, and we're buying almost 150 million pounds of resin now. I mean we've got a good buy position there. And so I'd say the acquirer of choice, it's the same model that I had in my prior company that really worked well for certain founder owners who wanted liquidity. The consequence of that, this life touch approach is that we can't pay as much as private equity, and it actually kind of keeps us out of those auctions, to be honest.

Thank you, Steve, and that concludes today's call. Thank you all very much for joining today. You may now disconnect your lines. Thank you.