Myers Industries Q1 2023 Earnings Call Transcript

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May 4, 2023

Key Takeaways

  • Myers expanded its adjusted gross margin for the fifth consecutive quarter and delivered record injection molding profitability via self-help and operational excellence initiatives.
  • Q1 net sales fell 4.3% year-over-year to $215.7 M as softened demand in recreational vehicle, marine and consumer end markets offset strength in food & beverage and industrial segments.
  • Free cash flow surged to $16.7 M in Q1, up from $2.2 M a year ago, driven by improved working capital management and self-help measures.
  • The company secured over $5.5 M in new business wins—including EV reusable container and industrial IBC contracts—and is advancing a military munitions case program with potential for up to $20–30 M in revenue.
  • Full-year 2023 guidance was maintained for low- to mid-single-digit net sales growth and adjusted EPS of $1.55–$1.85, with price increases and distribution segment progress expected to support H2 performance.
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Earnings Conference Call
Myers Industries Q1 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good morning, and welcome to the Myers Industries First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. Investor Relations. After today's presentation, there will be an opportunity to ask questions. To withdraw your question.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Monica Vinay. Please go ahead.

Speaker 1

Thank you. Good morning, and thank you for joining us. I'm Monica Vinay, Interim Chief Financial Officer and Vice President of Investor Relations and Treasurer at Myers Industries. Company. Joining me today is Mike McGaugh, our President and Chief Executive Officer.

Speaker 1

Earlier this morning, we issued a press release outlining the financial Results for the Q1 of 2023. We have also posted a PowerPoint presentation to accompany today's prepared remarks. If you've not yet received a copy of either the release or the PowerPoint, you can access them on our website at www.myersindustries.com under the Investor Relations tab. This call is also being webcasted on our website and will be archived along with the transcript of the call shortly after this event. Private Securities Litigation Reform Act of 1995.

Speaker 1

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. Financial Services. Also, please be advised that certain non GAAP financial measures such as adjusted gross profit, adjusted operating income, adjusted EBITDA and adjusted EPS may be discussed on this call. Further information concerning these risks, uncertainties and other factors Financial Services is set forth in the company's periodic SEC filings and may be found in the company's 10 ks and 10 Q filings. Securities and Exchange Commission.

Speaker 1

Now please turn to

Speaker 2

Slide 3 of our presentation.

Speaker 1

I'm pleased to turn the call over to Mike Mendoff.

Speaker 2

Thank you, Monica. Good morning, everyone, and welcome to our Q1 2023 earnings call. I'm pleased to report that our self help initiatives operational excellence efforts continue to deliver results. We expanded our adjusted gross margin for the 5th consecutive quarter and and we delivered significant free cash flow and I'm proud of these accomplishments. I'd like to specifically call out our injection molding businesses that continue to deliver record levels of profitability.

Speaker 2

Their great results were due to strong demand and also ongoing improvements in commercial segment. However, we experienced mixed end market demand, which ultimately led to a marginal decline in revenue. Over on the distribution side, sales were higher primarily due to the Mohawk acquisition last summer. Now I'll provide a brief financial review of the quarter before Monica outlines our results in greater detail. We achieved net sales of $215,700,000 segment, a decrease of 4.3%.

Speaker 2

From a market perspective, we saw strong demand within our food and beverage end market, mix demand within our industrial end market, but we continue to see reduced demand in the recreational vehicle, marine and consumer end markets where inflationary trends are impacting overall consumption and performance. To help offset demand headwinds, we have been laser focused on further diversifying our customer base and increasing our concentration in the higher growth end markets. We are pursuing growth and we are winning new business in the auto aftermarket, industrial and food and beverage end markets. Examples include a recent $1,500,000 new business win providing reusable buckhorn boxes to an electric vehicle manufacturer, a $4,000,000 new business win to an industrial reusable container supplier and a multimillion dollar large auto aftermarket customer win. We also continue to make progress testing and qualifying our septic cases for military lightweighting projects around the world.

Speaker 2

This new business development project has the potential to be a large economic success in the near future. Now back to our Q1 results. Adjusted gross profit was $71,200,000 or 33 percent of sales, a decrease of 1.6% on a dollar basis, with an increase of 90 basis points on a percentage basis. The increase in gross margin is a result of the self help initiatives we implemented in Horizon 1 and our actions on implementing our Myers business system, a business system that crystallizes our best practices and helps ensure they are sustainable and Repeatable across the company. You'll notice that SG and A is higher in the Q1 compared to the same period last year.

Speaker 2

Some of that is due to the Mohawk acquisition and some is due to a success fee paid on a legal win this quarter. We are pleased with the outcome and it was a significant win relating to a patent case in the Material Handling segment. Segment. Overall, the Q1 of 2023 was solid. We still have some work to do growing and optimizing our distribution segment.

Speaker 2

As you recall, we acquired Mohawk last summer and we continue to integrate the business, grow the business and take cost out. We need to grow our margins and to do this we have several price increases underway and expect to see positive margin movement over the next quarters. On the Material Handling side, we continue to take costs out of our operations and we continue to combine parts of the commercial organizations to lower costs and improve our sales effectiveness across all of the Material Handling business units. On the strategic front, we continue to transform the company, nearly doubling the size of Myers in the last 3 years. Over this period, we've built lasting competencies in pricing, in purchasing and in sales and operations planning.

Speaker 2

We've executed bolt on acquisitions and improved both our acquisition Integration Capabilities. Strategically, we are right where we want to be. Our capabilities are strong and our balance sheet is strong. We are well positioned to pursue the larger and more impactful acquisitions that we've outlined as a part of Horizon 2. At Myers, morale is high.

Speaker 2

Our employees are fired up about a once in a lifetime opportunity to really build a special company. It's an exciting time to be here at Myers Industries. Now I'll turn the call over to Monica for a review of our first Quarter Financial Results and Full Year 2023 Outlook. Monica?

Speaker 1

Thank you, Mike. Please turn to Slide 4 for a summary of our Q1 results. Segment. While we continue to successfully execute our long term strategy, economic challenges are impacting near term results. Segment.

Speaker 1

Our first quarter net sales were down $9,800,000 or 4.3% compared to the Q1 of 2022, segment, primarily due to lower sales in the Material Handling segment, which were partially offset by higher sales in the Distribution segment. Securities and Exchange Commission. On an organic basis, the contribution from higher pricing was more than offset by a decline in volume mix. Quarterly adjusted gross profit decreased 1.2 and dollars are 1.6 percent as contributions from pricing actions, lower raw material costs and the Mohawk Rubber acquisition were not enough to offset lower volume and a change in sales mix. However, adjusted gross margin for the quarter increased 90 basis points to 33% compared with 32.1 percent in the Q1 of 2022.

Speaker 1

1st quarter adjusted operating income decreased $5,500,000 or 21.4% compared to the prior year as a result of lower gross profit and higher SG and A expenses. SG and A expenses increased $4,100,000 or 8.5 percent to $52,100,000 Plus fees payable in conjunction with a favorable patent trial result. SG and A as a percentage of sales increased to 24.1% compared with 21.3% in the same period last year. Adjusted EBITDA was $25,900,000 in the 1st quarter, segment, a decrease of $5,100,000 or 16.5 percent compared to the prior year period. Adjusted EBITDA margin decreased 180 basis points to 12% for the Q1 compared with 13.8% in the same period last year.

Speaker 1

Lastly, adjusted EPS was $0.38 compared to $0.50 in the same period last year. Next, please turn to Slide 5 for an overview of our segment performance for the Q1. For For the Material Handling segment, net sales decreased $24,000,000 or 13.6% compared to the prior year. Segment. Net sales increases in the food and beverage end market were more than offset by decreases in the consumer vehicle and specific demand from industrial end markets.

Speaker 1

Material Handling adjusted EBITDA decreased $6,000,000 or 16.5 percent to $30,400,000 Lower sales volume and a change in sales mix more than offset lower raw material costs. Segment. Net sales for the distribution segment increased by $14,300,000 or 29.3 percent year over year. Excluding the incremental $13,900,000 of net sales from the Mohawk Rubber acquisition, organic net sales increased 0.9%. Distribution's adjusted EBITDA decreased $500,000 or 11.9 percent to $3,400,000 primarily due to higher product freight and SG and A costs.

Speaker 1

SG and A expenses were higher year over year as a result of the Mohawk Rubber acquisition and higher labor costs at distribution centers. The segment continues to integrate the Mohawk Rubber acquisition and to implement price increases to offset cost inflation and expand margins. Turning to Slide 6. Free cash flow for the Q1 of 2023 was $16,700,000 compared to $2,200,000 for the Q1 of 2022. The increase in cash flow was segment, primarily the result of a decrease in working capital.

Speaker 1

Working capital as a percentage of net sales decreased 60 basis points compared to the same period last year, Group, primarily due to contributions from our self help initiatives and stronger cash collections. On a sequential basis, Working capital as a percent of net sales decreased 20 basis points. Capital expenditures for the Q1 of 2023 were 9.1 $1,000,000 and cash on hand at quarter end totaled $28,200,000 Our balance sheet remains strong and continues to support our growth runway with the debt to adjusted EBITDA of 0.9 times. Now please turn to Slide 7 for an update on our outlook for fiscal year 2023. We are maintaining our guidance for the full year with net sales anticipated to increase in the low to mid single digit range.

Speaker 1

Segment. We expect that higher sales in the Distribution segment will more than offset sales decreases in the Material Handling segment due to softer demand in some of the segments' key end markets. In the Q2, we expect sales to be sequentially higher than in Q1, but to be lower year over year as a result of continued soft demand. In the back half of the year, we expect to deliver organic growth through price increases and the new business wins that Mike outlined. As always, we will continue to monitor market conditions and provide updates throughout the year.

Speaker 1

We continue to expect SG and A expenses business to approximate 22 percent of net sales. We are also still projecting approximately $6,500,000 of interest expense and an effective tax rate of 25% for the year. Finally, we continue to expect an adjusted EPS range of 1.55 to $1.85 per share. As Mike noted earlier, we have made significant progress on our self help initiatives and are seeing results. We expect cash flow from operations to continue to benefit from these initiatives and result in stronger year over year free cash flow generation.

Speaker 1

Before I turn the call over to Mike, I'd like to thank the entire Myers team for their efforts and hard work in the Q1. With that, I'll turn the call back over to Mike to provide an update on our strategy.

Speaker 2

Thank you, Monica. Please turn to Slide 8. As I've noted on prior calls, This slide outlines our 3 horizon strategy, which serves as our roadmap to transforming our company into a high growth world class organization. Additionally, our efforts against this strategy have yielded meaningful financial, cultural and operational improvements and we'll build on those improvements as we continue to grow the company. Turning to Slide 9.

Speaker 2

We've outline the 4 pillars that Horizon 1 is predicated on organic growth, strategic M and A, operational excellence and a high performing culture. To look at our recent progress within each pillar as shown on Slide 10. Starting with organic growth, due to strong demand for our seed boxes, we we were able to drive year over year growth of 19% in our food and beverage end market. We've also had success in winning a number of significant new accounts, helping offset weaker demand within consumer facing verticals. Additionally, we've implemented price increases across our distribution segment.

Speaker 2

We have more work to do here, but increasing price and expanding margin is in our wheelhouse and we will get it done. We also remain focused on our internal initiatives to drive organic growth. As I mentioned on our last call, we are focused on customer driven innovation, How we can take existing products and extend them, make them higher performing or make them fit better with our customers' aspirations or needs. This approach is paying off with specific targeted organic growth wins. Shifting to our 2nd pillar, strategic M and A.

Speaker 2

I continue to be optimistic about the Mohawk Rubber acquisition that we made in the distribution segment. It provides us more channel power and ability to serve our customers better than ever. As we continue to integrate Mohawk, I expect our distribution segment to deliver team. While we continuously refine it with each additional acquisition, we view it to be repeatable, scalable and able to deliver the fast Deliver fast and accretive results. Additionally, the health of our balance sheet provides us with the flexibility to continue pursuing bolt on opportunities as well as the enterprise level M and A we expect to complete as a part of Verizon 2.

Speaker 2

With respect to the operational excellence pillar, we are focused on the implementation of our Myers Business System, which is integral to Myers Transformation. Myers Business System makes the company more resilient. It documents and ensures all the progress we've made over the last 3 years and ensures that those improvements are repeatable and lasting. I want to ensure the significant gains we've made at Myers are institutionalized and have longevity. A perfect example of this comes from our purchasing team, whose approach, aggression and best practices to lower our total costs are unique and very effective.

Speaker 2

I've spoken about this model, we call the SALT model before, standardize the buy, aggregate the buy, Leverage Your Suppliers and titrate the cost. The SALT model is key to Myers' success and it's part of the Myers Business System. It sounds simple, but I found that in many companies it's not applied fully, rigorously or even at all. As we evaluate other peers or competitors in the market and as we evaluate potential acquisitions, we often see that there are raw material cost reductions left on the table. We also see there are price increases left on the table as well.

Speaker 2

Squeezing both of these levers is what we do well and what gives me confidence in our ability to execute and implement the EBITDA performance of our acquisition targets. Group. Last, moving to our high performing culture. To start, we recently announced the appointment of our new Chief Financial Officer, Grant Fitts. Successfully integrating acquisition will be invaluable to our transformation into our 3 Horizon strategy.

Speaker 2

I look forward to Grant joining our team on May 8. Additionally, Grant's hiring echoes our ability to attract large cap talent to our small cap company, fueling our strategic progress. While we are benefiting from an influx of strong talent Company, we also continue to invest in our internal talent through our employee development and training programs. These training programs and investments are improving our capabilities across the board. In conclusion, I remain confident in the strategic progress and the future direction of Myers.

Speaker 2

Before we open the call for questions, I want to thank Monica Vinay for doing a tremendous job as our Interim Chief Financial Officer. Monica has been a great partner and has done a nice job leading our finance team through this interim period. Thank you, Monica. With that, I'd like to turn the call over for questions. Operator?

Operator

We will now begin the question and answer session. Our first question comes from Jonathan Navarrott with TD Cowen. Please go ahead.

Speaker 3

Hey, good morning. It's Santa on for Lance. I'd like to start off with The trends in April May, particularly, so I understand that there's been some weakness and RV, Marine, Consumer and End Markets. But overall ahead of the summer season, are you seeing this pickup in the 1st 2 months of the second quarter?

Speaker 2

We're seeing some of the continued trends. Food and beverage is still strong. Parts of industrial are still strong, parts are a little more balance of industrial. RV and consumer, RV in particular continues to stay weak. Consumer our outlook for the lawn and garden season is to be expected.

Speaker 2

That's coming in and meeting our expectations on lawn and garden, which is a part of consumer. Some of the higher ticket items we talked about, whether it's your decorative high dollar items that we make for various retail outlets, There's still pressure. The consumer doesn't have the discretionary dollars that they had a year ago.

Speaker 1

Yes, I would just add that on the consumer, the part that Mike talked coming as we expected. I would say that's just starting here in May. I think we've had kind of a late start to the spring season, so that's impacted April.

Speaker 3

Okay. Thank you. Now I see that there's more focus on food and beverage as you mentioned Coin and there's more opportunity there. To what extent can that offset the weakness in the other end markets? I don't expect it's going to take up all of the slack, right?

Speaker 3

So I just kind of want to know how much can we see food and beverage take on.

Speaker 2

Yes. So a lot of that's driven by ag and the box seat box sales we have. We also have good traction in IBCs and a number of our business units make IBCs that go into food and beverage and that's doing quite well also. We expect the back half of the year to be strong for both of those end markets from a volume standpoint and a margin standpoint. How much can it cover?

Speaker 2

Right now, I think we're on an upward trend. We're on an upward trend. So We didn't cover totally on a revenue basis in Q1. I think Q2 would probably be Repeat of the same, but the back half of the year, we see price taking root in these end markets It's like auto aftermarket. I've talked a lot about price increases that we're driving in distribution, on the heels of the Mohawk acquisition.

Speaker 2

You'll see that come through in the second half of the

Speaker 1

year. Yes, I would just add that. So if you I talked about on the prepared remarks that In the second half of the year, we anticipate delivering organic growth. That'll be a combination of the price wins, the customer or the price increases, the customer wins that Mike talked about and the increase in food and beverage. But we do anticipate mid to high single digit growth in both Q3 and Q4.

Speaker 2

Yes, that's right. We've got confidence on those numbers.

Speaker 3

Okay. And last one for me. Just looking at your cash flow statement, I see that CapEx is a little bit higher than what it has been in prior quarters. And I'm wondering, is this because there was some type of small acquisitions during the quarter?

Speaker 2

Some of that still is catch up capital from 2016, 2017, 2018. We've brought in some really capable experts in operations who are helping us run our plants better, schedule our machines, load our machines better. We also need to step it up on maintenance and do some catch up capital expense. Some of that as well is spending for growth capital, particularly in food and beverage and some of the industrial end markets. So that's where you see the capital.

Speaker 2

I don't anticipate over the long term us running as rich CapEx expenses as it appears we will be in the back half of this year. A bit of that is ketchup, John.

Speaker 3

Okay. Okay, got it. Thank you.

Speaker 2

Thank you.

Operator

The next question is from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Speaker 4

Hi, good morning. Hi, Steve. What kind of industrial end markets are you pursuing? And would that be displacing another competitor or for new product applications?

Speaker 2

A bit of it is some of both, some of both. A lot of it is Larger Markets, the Niche Applications, it's fuel tanks, hydraulic fuel fluid tanks, Tanks that are going into construction application, agriculture application, industrial application. So it's the area we know well, Steve. We make high quality tanks at a high volume. We can do that really well.

Speaker 2

But it was kind of moving ourselves out of too much of an RV focus, too much of a consumer focus and more into industrial or infrastructure, construction and agriculture. Heavy equipment in providing the hydraulic fluid tanks, fuel tanks, water tanks for that type of equipment. We've had a lot of wins there. The wins are it's a long time coming and they're $1,000,000 $2,000,000 $500,000 here or there. And it's hard to cover the dramatic decline in RV as quickly as we would like.

Speaker 4

Yes, I understand that, but you should have pretty good runway on industrial. I think pretty much every machinery company I cover has a record backlog right now.

Speaker 2

You got it. That's right. That's right. So we're having some wins there with specific customers that are big names and That's part of also the capability we brought in on engineering and manufacturing over the last 2 years. Those guys have our plants humming and our quality is up, and there's a lot of runway there.

Speaker 2

You are correct. I just wish I could see it sooner.

Speaker 4

Yes. You mentioned a military program. Can you talk about any more detail on that and just how big could that be over time?

Speaker 2

Yes. It's for the armament for the various munitions. And so globally, there's rearmament not only in the U. S, but the Ukraine war has depleted reserves, but it also has heightened everyone's awareness that we need to rearm. And so we're making the cases for the various munitions.

Speaker 2

We've had some favorable results on testing. So Steve, in the past, there's been some hesitancy to go to plastic from metal or wood, but the demand now is so great that the hesitancy has declined and the interest now is high. And even as recent as this week, we've had some favorable results on some qualification tests. The dollar amount, it could be $10,000,000 I think longer term $20,000,000 or $30,000,000 over the next, let's say, next 24 months. I'll look to Monica, she may be a little closer to that than I.

Speaker 2

Yes.

Speaker 1

No, I think in the near term, it will be probably closer to or a little below the $10,000,000 range and then in the next 12 months to 24 months closer to $20,000,000 Yes,

Speaker 2

Steve, what we're doing there is we're using those assets as your portable Fuel Containers, shrink 3% a year, whatever it is with electrification. It's like, all right, where else can we take our expertise? And military has filled in military is really good margins and also that volume has taken off and it looks like for the next decade or 2 military is going to be really, really strong. So We pivoted some of our engineers and sales capability to kind of move beyond portable fuel containers and move into Terry and we're really pleased. We're really pleased with what we're seeing so far.

Speaker 1

We just need to get to the final

Speaker 3

Yes.

Speaker 4

Yes, understood. No, that sounds good. And I know you've been doing a lot of sales force training and realignment. Do you have the right number of salespeople for the footprint and the product lines you have right now?

Speaker 2

Yes, that's a good point. What we're finding Steve is combining the sales forces of Rotational molding and blow molding, there's so much overlap there and we have so much capability now. Getting those teams to work together or consolidating them, we're actually finding we can reduce cost and actually it gives us more effectiveness with the customer. If we're repping 1 Myers and all these capabilities we have, I've been talking about it for 2 years. We're making progress.

Speaker 2

It's still a journey. Overall, on the distribution side, again, we're going to test price. We're going to test price. We'll bring a lot of value to our customers. And ultimately, If we test price and we get higher margins but less volume and that lessens the need for some salespeople, we'll take action there.

Speaker 4

Got it. And one last one for me. As you start to think about those larger and more impactful acquisitions you mentioned, Can you talk about what those could look like? Or does that mean multi site, multi process, just bigger in terms of revenue?

Speaker 2

Yes. We talked a little bit in the past about, all right, how do we view the company with a strategic lens. And we've talked about you've got auto aftermarket, You've got this storage, handling and protection vertical and then you have customer specific engineered solutions, engineered products. We still are thinking about that way. Our expertise is in metal and plastic right now.

Speaker 2

We're going to build on that expertise. So Clearly, look, we're not going to go off the reservation and do something too drastic there. I want to be sure that's clear. But There's a lot of capability we can bring in terms of we're really good at operational excellence. We're pretty good at commercial excellence.

Speaker 2

And so how can we acquire these companies, even larger ones, and do bring in our expertise in purchasing and pricing and S and OP, We think that's a winning market. We're also seeing valuations come down. We're seeing private equity on the sidelines, and we think it's just a great time to have our act together strategically, to have any of the kinks worked out on the small acquisitions, Have a great balance sheet. We're ready to go. I kind of feel it's going to be a buyer's market here over the next year or 2 and we're seeing that.

Speaker 4

You feel like you're ready to do a more sizable acquisition right now or is that still something back half of 'twenty three, early 'twenty four?

Speaker 2

We're ready. Capability wise, we're ready. We just have to find the right deals with the right economics. But We're getting we continue to get more calls. But capability wise, Steve, operations and commercial and then financial capacity, we're ready.

Speaker 2

We're ready.

Speaker 4

That's great. Thanks.

Speaker 2

Thank you. Appreciate your support. Thank you.

Operator

Vince back over to Monica Vinay for any closing remarks.

Speaker 1

Thank you for joining us today. We Appreciate your interest in Myers Industries. Have a great day.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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