Myers Industries, Inc. (NYSE:MYE) Q3 2023 Earnings Call Transcript

Myers Industries, Inc. (NYSE:MYE) Q3 2023 Earnings Call Transcript November 1, 2023

Myers Industries, Inc. misses on earnings expectations. Reported EPS is $0.38 EPS, expectations were $0.43.

Operator: Hello, everyone and welcome to the Myers Industries, Inc. Quarter Three 2023 Earnings Call. My name is Carla and I will be your operator for today’s call. Following today’s prepared remarks, there will be a Q&A session. [Operator Instructions] I will now hand over to your host, Grant Fitz, Executive Vice President and Chief Financial Officer of Myers Industries to begin. Grant, please go ahead.

Grant Fitz: Thank you, Carla. Good morning and thank you for joining us. I’m Grant Fitz, Chief Financial Officer at Myers Industries. Joining me today is Mike McGaugh, our President and Chief Executive Officer. We are both here in Las Vegas at the SEMA Auto Aftermarket Show, meeting with customers and suppliers in a very exciting industry. Earlier this morning, we issued a press release outlining the financial results for the third quarter of 2023. We’ve also posted a 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 webcast on our website and will be archived along with the transcript – transcript of the call shortly after this event.

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Please turn to Slide 2 of the PowerPoint for our safe harbor disclosures. I would like to remind you that we make some – 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 risk, uncertainties and other factors, which may cause results to differ materially from those expressed, or implied in these statements. Also please be advised that certain non-GAAP financial measures such as adjusted gross profit, adjusted operating income, adjusted EBITDA, adjusted EPS may be discussed on this call. 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.

Please turn to Slide 3 of our presentation, I’m now pleased to turn the call over to Mike McGaugh.

Michael McGaugh: Thank you, Grant. Good morning, everyone and welcome to our third quarter earnings call. The quarter’s results are a testament to our focus on operational and commercial excellence. These efforts have helped us offset near term macroeconomic headwinds. And as a result, I’m pleased to report that we have delivered our seventh consecutive quarter of adjusted gross margin expansion on a year-over-year basis. In addition, adjusted EBITDA margin also expanded this quarter. Our gross margin and EBITDA margin resilience, is a result of several operational excellence initiatives, including proactive cost containment efforts, manufacturing – optimization, and improved sales and operations planning. These initiatives continue to generate results.

While our third quarter’s top line was impacted by softer demand, particularly in end markets that are more consumer oriented. We continue to believe that there are significant organic growth opportunities ahead. In addition to our operational commercial improvements, we have continued to build upon an already strong balance sheet by improving free cash flow and paying down debt, allowing us to reach historically low leverage ratios. Due to our balance sheet, we remain proactively engaged in evaluating inorganic growth opportunities that, can accelerate our financial and strategic objectives. We continue to evaluate M&A opportunities with discipline, ensuring that a potential acquisition fits our strategy, and it’s the right move for our shareholders.

While embracing this disciplined approach, we continue to refine our M&A process, strengthen our deal flow, ensure that target criteria are met and capture the learnings of our recent bolt-on acquisitions. We are well positioned with strong capabilities, good cash flow and a price balance sheet, just as more targets come to market at reasonable valuation. As I’ve said before, we will be disciplined and patient. We will have the capability, to act and we will do so, when the time is right and the deal structure is right. Now, I will pass the call back to Grant to walk through our financial results for the quarter.

Grant Fitz: Thank you, Mike. Please turn to Slide 4, for a summary of our third quarter results. Our third quarter net sales, were down $30.3 million, or 13.3%, compared to the third quarter of 2022. This was primarily due to lower sales across both segments, with the Material Handling segment experiencing lower demand levels within RV, marine and consumer facing verticals in addition to a calmer hurricane season. Despite the sales decline, our adjusted gross margin for the quarter increased 20 basis points to 30.7%, compared with 31.5% in the third quarter of 2022. This marked the seventh consecutive quarter with year-over-year adjusted gross margin expansion, and is, as Mike said, a testament to the power of buyers of our buyers’ business system.

Our quarterly adjusted gross profit, decreased $9.2 million or 12.8% as price increases in the Distribution segment, and cost containment efforts, were not enough to offset volume decreases in both segments, due to the challenging macroeconomic and inflationary environment. SG&A expenses decreased $8.1 million year-over-year, and SG&A as a percentage of sales decreased 60 basis points, to 22.1%, compared with 22.7% in the same period last year. The decrease as a result of lower incentive compensation, labor and facility costs, which were part of our strategic cost containment efforts. Third quarter adjusted operating income, decreased $2 million, or 9%, compared to the prior year, as a result of lower gross profit not fully offset, by the SG&A reductions.

Adjusted EBITDA was $25.6 million in the third quarter, a decrease of $1.6 million, or 5.6%, compared to the prior year period. Adjusted EBITDA margin increased to 110 basis points to 13% for the third quarter, compared with 11.9% in the same period last year. Lastly, adjusted EPS was $0.38, compared to 41% or $0.41 in the same period last year. Next, please turn to Slide 5, for an overview of our segments’ performance for the third quarter. For the Material Handling segment, net sales decreased $23.2 million or 14.9%, compared to the prior year. The decrease was a result of softer demand in the RV, marine and consumer-facing end markets as I mentioned earlier. Material Handling adjusted EBITDA, decreased $3.3 million, or 11.6% to $25.1 million, but adjusted EBITDA margin increased to 19% or 70 basis points, compared to the year ago period.

The margin increase was driven by self-help initiatives, partially offset by lower sales volume. Net sales for the Distribution segment, decreased to $7.1 million or 9.8% year-over-year, primarily due to lower sales volumes. Given the actions to improve – the Distribution’s business model, through improved pricing and lower cost structure Distributions adjusted EBITDA increased year-over-year $0.6 million, or 9.4% to $6.6 million, in spite of the year-over-year revenue decline. Along with the improved pricing, SG&A expenses were lower year-over-year as a result of lower labor costs, largely due to improving our go-to-market and back office organizational structures through our self-help initiatives. Turning to Slide 6, free cash flow for the third quarter of 2023 was $18.1 million, compared to $9.8 million for the third quarter of 2022.

The increase in cash flow was primarily the result of lower working capital. Working capital as a percent of net sales decreased 50 basis points, compared to the same period last year, primarily due to stronger cash collection. Capital expenditures for the third quarter of 2023, were $4.1 million and cash on hand at the quarter end totaled $24.8 million. Our balance sheet remains strong and continues, to support our Horizon strategy with the debt to adjusted EBITDA of 0.7 times. Now please turn to Slide 7, for an update on our outlook for the fiscal year 2023. Given the continued macro challenges and the softer demand, we seen across several end markets, we revised our top line guidance to now decline, between mid to high single-digits. As a result of this, we are also lowering our bottom line guidance to $1.20 to $1.28 for diluted EPS, and $1.35 to $1.40 for adjusted diluted EPS.

We continue to retain a strong balance sheet which is supported by consistent free cash generation. For the full year, we expect capital expenditures to be in the range of $25 million to $30 million and an effective tax rate – to approximate 25%. We are seeing tangible improvements from our efforts to run the business more efficiently through our Myers’ business system and remain focused on optimizing operations to combat the current macro-economic headwinds. We are creating critical capabilities that support significant value – or support significant future growth and bottom line expansion. Now, I will turn the call back to Mike. Mike?

Michael McGaugh: Thank you, Grant, Please turn to Slide 8, where we reference our law long-term, three Horizon strategy highlighting the key areas of focus for each Horizon. Slide 9, provides a view of the four strategic pillars, we used to drive alignment and execution. As highlighted on the slide, the strategic objective of the first Horizon, is to deliver a target revenue of over $1 billion and an EBITDA margin of 15%. I continue to believe this performance is within the organization’s reach. However, near term end market weakness, coupled with our decisions to not acquire companies that were either off strategy or too expensive, has delayed our realization of this Horizon 1 target. I continue to believe that we can achieve this performance target in the near term.

Before shifting to our progress against these pillars, I want to reiterate the importance of Horizon 1. The strategic operational and financial actions we take in this first Horizon are building the foundation of Myers and are critical to successfully reaching the milestones of Horizon 2 and 3. Turning to Slide 10, I would like to provide more color on what we’ve accomplished in the recent quarter against our Horizon 1 objectives. Starting with organic growth, we still see meaningful runway for both revenue and margin expansion, across our segments in lieu of challenging market conditions. Within the Material Handling segment, our military-related products, continue to experience strengthening demand levels, due to increased artillery production and rearmament of militaries worldwide.

We have recently received a meaningful new purchase order and expect to receive more shortly. We expect military growth to bridge the gap, caused by a multiyear reduction in the size of the fuel can market, due to electrification. We expect the gas can market, to reduce in size 3% to 5% per year, over the next five to seven years. I expect our military showcasing growth to cover this EBITDA gap and then some. Second in our injection molding and structural foam business. We expect new sales growth in our industrial food and automotive Buckhorn to supplement any decline in seed box sales, if agriculture equipment sales cool going into 2024 and 2025. Third, eCommerce will be a substantial organic growth driver, ensuring that our Material Handling and Distribution businesses grow at above market rates in the near and intermediate term.

Myers’ significant diversification of its segments end markets and products ensure that the company’s financial performance is resilient. We’re seeing this in real time throughout 2023. In our Distribution segment, we grew third quarter EBITDA year-over-year and we’re putting in place the building blocks, to have an even stronger Distribution business going forward. We’re excited about this business, because we see significant opportunity for the segment due to the electric vehicle megatrend, which will increase demand for tire repairs, as heavier electric vehicles require more frequent tire maintenance and replacement. In addition, the average age of cars on the road, continues to increase. In this ageing auto fleet, is driving an increase in tire and other repairs, both of which are good for Myers’ tire supply.

It’s important to highlight that we have a high quality industry leading Distribution business embedded in our company. The Distribution business along with acquisitions of Tuffy and Mohawk now as the size, scale and strategy, and is beginning to deliver the performance we expect and have communicated in the past. We anticipate that this business will become even more attractive for Myers’ in the future. Across both segments, we remain dedicated to supporting organic growth opportunities with investments in sales and innovation. Shifting to strategic M&A, our strong cash flow generation and flexible balance sheet provide us the ability, to evaluate many inorganic growth opportunities. Myers has executed four bolt-on acquisitions over the past five years.

Along with providing revenue and EBITDA growth. These acquisitions have delivered scale and geographic expansion, while helping us learn and improve our processes and capabilities. As we enter into Horizon 2, we will focus on larger, more impactful acquisitions. Based on our learnings and experience attained in Horizon 1, I’m confident in the company’s ability to acquire the right companies, the right capabilities at the right valuation. Moving on to the third pillar, operational excellence. We’re keenly focused on this pillar during these times of choppy demand. These self-help measures are largely within our control and enable us, to protect margins and profitability. Most notably our efforts to build out the Myers’ business system. Please turn to Slide 11.

The Myers business system delivered meaningful results, driving operational improvements in supply chain and in procurement, as well as other cost reduction initiatives. As I mentioned before, institutionalizing our best practices, and ensuring they’re lasting, and a part of Myers’ DNA, is a vital component of delivering sustainable EPS growth, and driving Myers transformation into a world-class diversified industrial company. Moving on to our last and one of our most important pillars, our high performing culture. We continue to punch above our weight in the caliber of talent we have at Myers. This includes legacy performers who are focused on making Myers world-class, as well as new additions to want to meaningfully grow the size and value of the company.

Our model to hire an employee individuals at the capstone of their careers has proven to be a breakthrough. This model allows us to have access, to a higher level of talent that most small cap companies, traditionally have access to. In closing, I’m proud of how the company has operated in its ability, to produce solid results in 2023, in spite of uneven and challenged end market demand. I’d like to thank all of our Myers’ leaders and associates for living our values, and for delivering for our customers, our shareholders and our communities. We are well positioned to capitalize on future organic and inorganic growth opportunities, which will ultimately deliver attractive shareholder returns. With that, I’d like to turn the call over to the operator for questions.

Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Lance Vitanza from Cowen. Lance, your line is now open. Please go ahead.

Lance Vitanza: Thank you. Thanks, everyone. Let’s start off with the tough stuff, the revenue outlook. The trends over the first three quarters, right year-over-year revenue declines, right have gotten worse, not better. And so given that, I guess I’m surprised by how wide the range is for full year revenue guidance, and really what you’re seeing, or thinking for the fourth quarter. Although, I guess, given the narrowness of the EPS range, I guess that kind of answers the question, right. I mean, really, we should be thinking about sales in the fourth quarter down, 8%, 9%, 10%, I would imagine is that fair? And I guess just more broadly, is there anything that you can point to specifically that would suggest, the trends improve in fourth quarter or is it simply, they can’t keep getting worse forever?

Grant Fitz: Yes. Hi, Lance. Good to talk with you. So, I think you’ve hit it on the head, in terms of what we’re looking at. What I would say is, just in general, maybe the level set a little bit, is this is really my first quarter to start to get my hands around the business. I’ve been in Myers now for about six months. So my tendency within guidance, is to probably be a little bit more conservative to be very open. I just, I feel that, we need to be transparent on where we’re at. But certainly, I don’t want to, have a situation where we aren’t able to meet the objectives that we set out for the company. And so from that standpoint, I think we continue to see headwinds in the RV and marine markets. Those are big, big markets, for us.

But, the big question in that area is, when will those markets start to recover? If you talk look at the analysts that we’ve had, that we’ve been looking at over the last couple of months. They are projecting to start to see some of that picking up in 2024. We really would – I’ll probably being a little bit more concerned that, we would see that continuing through the fourth quarter, and then we’ll see how that goes in ’24. But I would expect that will still probably be flat on the RV and marine segments as we go into next year. The other piece is, that we did have, some pretty strong impacts of calmer hurricane season. In Q3, typically on a full year basis. Hurricanes, activity would generate about $0.08 of earnings per share, we really don’t see a significant impact for hurricanes this year.

Certainly things could change if something were to pick up in the fourth quarter. And then also, we did have some expectation that our military orders with the shell casings that Mike talked about, we’re going to start in the fourth quarter – third and fourth quarter. We do not have, a firm commitment, which is the very positive news on this. So, we do have some firm orders. But those aren’t going to be started until the – first quarter of next year. And so essentially, we’re in a situation where we’ve got just a timing issue with the military orders that have come into play as well to. The rest of the business, I’ll let Mike comment on it, I think – it’s pretty, it’s pretty stable overall, in terms of our other end markets that we have, certainly there will be some ups and downs.

What I really am excited about, is our distribution business has put in what I would say are some of the foundational block, building blocks of really – starting to take that – their EBITDA margin up to a higher level than what we’ve seen – seeing this year. And certainly, I think Q3 is starting to give some indication of that. Lance, just a really nice job on working – the overall cost structure. And I think that’s setting them up really quite well as we look to the future. So Mike, I don’t know if you have some other comments.

Michael McGaugh: Yes, I mean, Grant hit it well. We talked at last quarter about, being on the lower end of the – guidance range – caveating that with having a traditional hurricane season, which didn’t materialize. We also had a bit of a timing shift on some of the military orders that, is going to be a very good business for us. The positive note is the orders have been confirmed, and we’ve got some orders that will begin next year. We also one other point I would add on to Grant was, we did have a couple mold repair issues in our buckhorn seed box business that, has shifted some of the revenue as well out a third quarter into fourth and into first next year. So that’s another factor. That’s it. Excuse me.

Lance Vitanza: That’s helpful. And then I guess, just my follow-up, first follow-up better news, right, the margin performance and I – just really outstanding in the third quarter across the board, both segments. And I guess the question there is, is there a risk that Myers is leaving itself, with all of these aggressive actions? Is it impairing Myers ability in any way to participate as end markets eventually recover, right? We know they’re going to we don’t know when, but we know they will. And I just, are you still going to be able to participate fully to the upside or have you sort of, you know, putting yourself behind the bar, you know, behind the APA, so to speak?

Michael McGaugh: Yes. Hi Lance, fair question. And this is something we try to find the right balance with, on a daily basis. We are preserving that growth – upside and optionality. We have talked in the past about the hidden factory, and how we do S&OP better. How we run our plants better, schedule our plants better, that’s getting more output of our existing assets. And so, we’re making a few decisions on the roto molding business, for example, to consolidate some of the footprint that’s taking cost out, but it’s not impacting our volume and capacity. On the sales and marketing side, we continue to go great guns on innovation, new product development, that’s an area that continues to be well resourced. We actually have consolidated our marketing and commercial function into Milford, Ohio.

I think I mentioned that before. It’s a – that’s across the material handling business. So it’s actually catalyzing the innovation and collaboration between each of the molding technologies. And we’re already seeing that bear fruit. And example is, look, if seed box sales potentially cool in ’24 and ’25. We’ve got some innovation efforts that are already bearing fruit on – as I mentioned, food, industrial, and then also automotive of boxes coming out of that buckhorn business, just a lot of good opportunity in general on the organic side.

Lance Vitanza: And then the last follow-up from me, they said the free cash flow was certainly stronger than we’d expected very surprising given the revenue performance, but it does appear to me that the free cash flow strength was mostly just, working capital and CapEx related and not to dismiss those. I mean, they are all important, but they don’t feel necessarily durable to me in the face of continued sales weakness. Could you talk about the outlook for, I mean, what should we be thinking about, not just for the fourth quarter, but just conceptually, like where CapEx goes and how you think about working capital as either a source or use of cash in 2024? And I guess with working capital, is it really just a function of, you know, if sales continue to be weak, you’re going to continue to get cash from working capital. And when sales eventually pick up then we should expect some reversal there and you’ll grow your working capital?