Earnings Call Transcript - MYE Q3 2024

Meghan Beringer, Director of Investor Relations

Thank you, Elliot. Good afternoon, everyone, and thank you for joining Myers' conference call to review 2024 third quarter results. I'm Meghan Beringer, Senior Director of Investor Relations at Myers Industries. Joining me today is Dave Basque, our Interim Chief Executive Officer; and Grant Fitz, our Executive Vice President and Chief Financial Officer. After the markets closed today, we issued a press release outlining our financial results for the third quarter of 2024. We have also posted a presentation to accompany today's prepared remarks, which is available under the Investor Relations tab at www.myersindustries.com. This call is being webcasted on our website and will be archived along with the transcript of the call shortly after this event. After the prepared remarks, we will host a question-and-answer session. Please turn to Slide 2 of the presentation for our safe harbor disclosures. 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. Also, please be advised that certain non-GAAP financial measures such as adjusted gross profit, adjusted operating income, adjusted EBITDA and adjusted earnings per share may be discussed on this call. Further information concerning these risks, uncertainties and other factors are set forth in the company's periodic SEC filings and may be found in the company's 10-Q filings. Please turn to Slide 3 of our presentation, as I will now turn the call over to Dave Basque.

Dave Basque, Interim CEO

Thank you, Meghan. Good afternoon, everyone, and welcome to our third quarter 2024 earnings call. I'm pleased to speak with you as Myers' Interim President and CEO. I would like to thank the Board for entrusting me to lead Myers Industries through this time of transition. I'm confident that together with the support of the Board, we will continue to make improvements to move Myers forward. Now let's discuss the highlights of the third quarter. Please turn to Slide 4. During the quarter, the addition of Signature Systems to the Myers' portfolio, along with Scepter's strong performance allowed for sales, gross margin, and adjusted EBITDA growth. For the quarter, Signature was the primary driver of our gross margin expansion due to their highly differentiated product line. Scepter sales increased about 60% versus the prior year, driven by additional contracts and revenue in the military end market and the delivery of fuel cans to help those impacted by recent hurricanes. These two power brands helped us grow during the quarter and demonstrate the benefit of developing similar branded products to drive Myers' growth. Demand headwinds persisted in several of our end markets, notably in recreational vehicles, marine and automotive aftermarket. In addition, we are now seeing reduced demand in the food and beverage end-market as many of our customers are delaying capital spend given current macroeconomic conditions. We anticipate cautious customer spending behavior for the remainder of the year and likely continuing into 2025. In response to these challenges, we are increasing our sales activity in the affected markets and introducing an added tranche of cost-cutting initiatives that will yield $15 million in annualized savings. These initiatives are incremental to the previously announced $7 million to $9 million cost improvement plan and $8 million in synergies from the Signature acquisition. This will strengthen our cost position and help mitigate revenue headwinds. The benefits of these actions are on schedule to be fully realized by the end of 2025. During the quarter, we also paid down $5 million of our Term A loan amortization and $8 million of our revolver, totaling $13 million of debt paydown. We remain committed to reducing our leverage ratio to approximately 2x by the end of next year, positioning Myers for future expansions and acquisitions. Given the current conditions, we are reducing our full-year guidance to the range of $0.92 to $1.02 adjusted earnings per diluted share. Slide 5 of today's presentation is a reminder of our strategic lens. Our storage handling and protection portfolio is comprised of four power brands. They are Buckhorn, Akro-Mils, Scepter and Signature Systems. This portfolio is positioned to grow while we focus on maximizing the value of our Engineered Solutions and Automotive Aftermarket portfolios. Slide 6 summarizes many of the actions that we have taken during the third quarter. Scepter was well-positioned to rapidly respond to the spike in demand for portable fuel containers in support of hurricane recovery efforts. Scepter is also working on winning new contracts for our lightweight military ammunition containers, which continue to see strong acceptance in that market. We also have strong sales momentum for Signature's MegaDeck ground protection product. We are expanding our product offerings through our e-commerce channel, which is growing faster than the industry average. Continued investment in our power brands and the e-commerce channel will fuel Myers' future growth. Across our Engineering Solutions and Automotive Aftermarket portfolios, we continue to focus on improving cash flow, as they have been adversely impacted by current macroeconomic conditions. In late September, we appointed a new leadership team for our distribution business. This team has significant experience in operational excellence, specifically in cost reduction and revenue growth. In a short amount of time, they've defined a series of positive actions to improve the business, focusing on commercial and operational effectiveness. We expect to see the results of these actions in the coming quarters. Turning to Slide 7. Let's review a few examples of how our power brands are growing. In this past quarter, we saw a spike in the use of Signature products by customers who are assisting in storm restoration efforts. And Signature's customer base is growing. Over 20% of their 2024 revenue will come from new customers. Additionally, turning to Slide 8, we anticipate Scepter will continue to grow. They are on track to exceed the 2024 forecast of $25 million of military sales. The Scepter team was also awarded the Pro Tool Innovation Award for its recently launched powered fueling station. This award highlights groundbreaking tools and fasteners from leading industry manufacturers. In summary, the sales of our power brands are growing. However, our consolidated results during the past quarter did not meet our expectations and we're taking both operational and commercial actions to improve our results. Now, I'll turn the call over to Grant for a detailed review of our third-quarter financial results and updates to our outlook.

Grant Fitz, CFO

Thank you, Dave. I would like to begin on Slide 9 to go over the full summary of the third quarter 2024 financial results. Net sales were $205.1 million, which increased $7.3 million or 3.7% compared to the third quarter of 2023, with the increase driven by both the Signature acquisition and strong demand for our Scepter products in both the military end market and for fuel containers, offset by lower pricing and volumes across the other segments. Our quarterly adjusted gross profit was $66.3 million, an increase of $3.7 million, or 5.8%, compared to Q3 of last year. Adjusted gross margin was 32.4% compared to 31.7% in 2023. The favorable variance in adjusted gross margin was largely driven by the acquisition of Signature, favorable product mix and lower material costs, partially offset by lower pricing and volume. Selling, general and administrative expenses increased $4 million, or 9.1% to $47.7 million due to the acquisition of Signature, partially offset by cost savings initiatives and reduced variable compensation. SG&A as a percentage of sales increased to 23.3% in the third quarter of 2024, compared to 22.1% in the same period last year. Operating income in the third quarter decreased to a loss of $4.8 million as compared to $18.7 million in Q3 of 2023. In the quarter, we recognized a $22 million non-cash charge for goodwill impairment related to the rotational molding business within our Material Handling Segment. The impairment primarily results from the continued anticipated market headwinds that we have seen in that business. The charge does not affect cash or covenant compliance. On an adjusted basis, operating income increased to $20.5 million compared to $20 million in the third quarter of 2023. Third quarter adjusted EBITDA was up to $30.7 million versus $25.6 million in the prior year quarter. Adjusted EBITDA margin was 15% compared to 13% in the third quarter of last year, primarily associated with Signature's high-margin profile. Diluted adjusted earnings per share was $0.25 compared to $0.38 in Q3 of 2023, with a difference largely driven by increased interest expense related to the term loan, which was used to finance our acquisition of Signature. For an overview of each segment's performance, please turn to Slide 10. For the Material Handling Segment, net sales increased to $18.2 million or 13.8% compared to the prior year. Sales from Signature and Scepter's Military and Gas can growth were partially offset by sales declines, primarily in seed boxes and IBC paste containers within the food and beverage end markets, as well as continued headwinds in the RV and marine end market. Material Handling's adjusted EBITDA increased $8.3 million, or 33% to $33.5 million and adjusted EBITDA margin increased to 22.2%, or an improvement of 320 basis points compared to the prior year. The positive margin improvements were attributed to the Signature acquisition, partially offset by higher material costs and lower sales volume and pricing. Net sales for the Distribution segment decreased $11 million, or 16.8% year over year to $54.4 million, driven by lower volume and pricing partially offset by improved SG&A costs. Adjusted EBITDA for the Distribution segment decreased $3.4 million, or 51.8%, to $3.2 million, resulting in adjusted EBITDA margin decreasing 430 basis points to 5.8% as compared to 10.1% in the prior year's quarter. The variances in EBITDA and margin performance as compared to Q3 of last year were primarily driven by decline in sales volumes and pricing partially offset by favorable sales mix. Turning to Slide 11. As prefaced earlier, we are continuing to identify and execute on an additional tranche of cost-cutting initiatives with an annualized savings goal of $15 million, which is incremental to the original $7 million to $9 million target and $8 million in Signature synergies. Generally, these additional initiatives will be driven by labor savings, manufacturing efficiencies and other savings initiatives. These new cost savings actions will also help to mitigate the continued revenue headwinds that we are seeing in several of our end markets. The annualized cost improvement plan will also continue to drive our transformation as Myers evolves into a simpler, more efficient organization and better positions the company to accelerate growth when market conditions improve. Turning to Slide 12. Free cash flow for the third quarter of 2024 was $10.1 million compared to $18.1 million for the third quarter of 2023. Working capital as a percentage of sales was up compared to the third quarter of 2023 due to timing of receivables and increased seasonal inventory levels at Scepter and increased inventory at Patch Rubber. Capital expenditures for the third quarter of 2024 were $7.2 million reflecting additional investment in production capacity and maintenance projects. Cash on hand at quarter end totaled $29.7 million. Our debt to adjusted EBITDA ratio on a pro forma basis for the trailing 12 months at the end of the third quarter was 2.7 times, up slightly from 2.6 times in the second quarter primarily due to the lower quarter-over-quarter earnings. As Dave mentioned in his introduction, during the quarter the company paid down $13 million in debt with $5 million for the Term Loan A amortization and $8 million for the revolver. On Slide 13, I want to reiterate Myers' capital allocation priorities. As noticed, we are focused on creating a simplified Myers through cost-cutting initiatives and increasing revenue and volumes via the strength of our four power brands. Additional cash on hand will be allocated first to pay down debt. Myers is focused on maintaining a sound balance sheet with ample liquidity to support the company's investment priorities. Now please turn to Slide 14 which shows our updated outlook for fiscal year 2024 and our prior guidance. We are reducing our full-year guidance to reflect softer demand in several of our end markets which we discussed earlier in this presentation. Our new guidance ranges are, net sales growth of 0% to 5%; net income per diluted share in the range of $0.11 to $0.21, the prior outlook was $0.76 to $0.91; adjusted earnings per diluted share in the range of $0.92 to $1.02; capital expenditures in the range of $28 million to $32 million with an effective tax rate remaining at approximately 26%. Turning to Slide 15. Our third-quarter results were significantly impacted by unfavorable macroeconomic conditions affecting some of our end markets. We are looking toward the future and remain committed to executing our strategic priorities and driving growth across Myers Industries. We are executing on our long-term strategy. Our $350 million investment in Signature is delivering strong results. We are positioned to acquire additional businesses with strong brands that hold top positions in profitable niche markets. We are also implementing $15 million in new annualized cost savings. These actions will help to mitigate the pressures from end market headwinds, enabling us to remain competitive. An important priority is improving our Distribution business. The new leadership team is identifying positive actions to improve the performance of this business. Finally, we are increasing our participation in high-growth end markets, including sectors such as military and infrastructure, and expanding our e-commerce channel to capitalize on new sources of demand. These proactive steps will improve our cost competitiveness and position Myers for longer-term growth as demand in some of our end markets recovers. With that, I'd like to turn the call over to the operator for questions.

Operator, Operator

The first question comes from Christian Zyla with KeyCorp. Your line is open. Please go ahead.

Christian Zyla, Analyst

Thank you. Good afternoon, everyone.

Grant Fitz, CFO

Hi, Christian.

Christian Zyla, Analyst

First question, Dave, I know you've been at Myers for four years now. But as you've been in the CEO seat for the last two months, what have you been focused on and in which parts of the business do you think you can make the biggest impact?

Dave Basque, Interim CEO

We are concentrating on two key areas. The first is expanding our power brands, and the second is managing our costs more effectively in our engineered products businesses. We are currently developing a series of plans to meet these goals. It has been a hectic period for us, and I've gained a lot of insights, but those are our primary focus areas.

Christian Zyla, Analyst

Great. Thanks. And then I guess as the year has played out, where have you guys been the most surprised with the performance of your four power brands and where do you see the most upside in the near term or mid-term?

Grant Fitz, CFO

Yes. Hi, Christian, this is Grant. Reflecting on the year, we have encountered significant challenges, particularly in the RV and marine sectors and within our automotive aftermarket distribution business. Unfortunately, these issues have persisted throughout the year. Since our last discussion during the Q2 earnings call, we have noticed further difficulties in our food and beverage market, especially concerning seed containers and IBC paste containers. We anticipated some declines in seed containers due to last year's record numbers and the natural seven-year cycle of that product. We hoped to counterbalance this with gains from our industrial boxes and IBCs, but this has not materialized fully. This is likely the most noticeable change since our last meeting after the Q2 earnings call. Furthermore, we have recognized the need to make adjustments in our distribution business to steer it back on course and pursue growth. We have previously discussed the challenges related to the Mohawk integration. Our current focus is on enhancing the overall commercialization of that business, identifying gaps in sales coverage, and addressing issues to regain customers lost during the Mohawk transition, along with implementing cost reductions. We are optimistic about the team we have assembled, as they possess strong capabilities, and we have made significant changes in other leadership roles within the distribution business as well.

Christian Zyla, Analyst

Thanks. I guess that tees up my next question pretty well. So your EPS guide suggests 4Q in a range of $0.07 to $0.17. So should we be thinking that distribution will post negative margin or is it positive and you expect a significant reduction in the material handling margin?

Grant Fitz, CFO

Yes, it's likely to be a mix of factors. Generally, we may experience some seasonality in the fourth quarter, as some of our businesses tend to slow down during this time. This will affect margins due to lower volumes in our Material Handling business. However, I wouldn't rule out the possibility of the Distribution business remaining profitable, as we aim to grow profits in the long run. There are certainly challenges ahead for that segment, especially with the leadership changes we need to implement. Regarding the upsides for the business, we see substantial potential, particularly in the military business for Scepter. We discussed plans to grow that segment from approximately $11 million last year to over $25 million this year, with projections of reaching $40 million next year. We're excited about the strong improvements as we expand our contracts and capacity for this business. Furthermore, we anticipate additional benefits from hurricane recovery efforts in the fourth quarter, which could provide upside opportunities. We are also optimistic about the Signature business, where demand for infrastructure projects remains robust, contributing to our long-term growth. Additionally, our e-commerce channel continues to perform well, supporting our four core brands and other areas, including our rotational molding business and RV tank sales.

Christian Zyla, Analyst

Great, thank you. Last one for me and then I'll jump back in queue. But just kind of going on that e-commerce point is, can you just give us an update on the e-commerce strategy, kind of what's been working? And then are there other parts of your portfolio that you look at and think can benefit from opening up to some e-commerce or DTC channels? Thank you.

Dave Basque, Interim CEO

Yes, we continue to see growth in Akro-Mils, our largest product line sold through e-commerce, primarily on Amazon. We are improving our ability to drive sales on this platform, which is contributing to our overall sales increases. Additionally, we are launching new product lines on Amazon, such as Roto products and some distribution products including Scepter. All of these efforts are fostering our growth. We have a dedicated team focused on this strategy, and we invest significant effort into it. Managing our competitive position on Amazon is a delicate process, but we are becoming more proficient, leading to increased sales and robust margins for these products.

Christian Zyla, Analyst

Great. Thank you for the color.

Operator, Operator

We now turn to William Dezellem with Tieton Capital Management. Your line is open. Please go ahead.

William Dezellem, Analyst

Thank you. Two questions. First of all, does Jeff and the new distribution team come with salespeople or relationships with salespeople that they can bring in to kind of quickly to help fill the disti gaps or will they be in a more traditional recruiting process to bring additional people in?

Dave Basque, Interim CEO

Yes, I think there's a little bit of both there, right? They do have relationships in the industry and they're already taking action to bring certain salespeople on board. But we are also recruiting. They've done a very good job of analyzing the territories, a very good customer analysis to determine where we have coverage gaps, and they're working rapidly to fill those positions.

Grant Fitz, CFO

And the other thing I would just add, Bill, is we are here in Las Vegas at the SEMA Conference this week. So that's one of the largest Auto Aftermarket conferences. And just in short order, the team has really done a nice job in putting together a very big promotional program that's been sponsored by our suppliers that we really are pretty excited about to see that we might get some additional incremental volume that we haven't quite anticipated completely through this activity here this week. So just in a short time, the team's been there for probably less than a month, but they really have come up with some good analysis, as Dave mentioned, but also good fresh thinking about ways that we can leverage some of our existing channels and also leverages things like this with the event that we have here at SEMA this week.

William Dezellem, Analyst

Great, that's helpful. And then back to the original cost savings of $7 million to $9 million. What was the original anticipated timeline for that to be fully implemented?

Grant Fitz, CFO

Bill, this is Grant. It's similar to what we have with the $15 million. It's likely to be a bit more front-loaded because we started earlier and announced some closures in our distribution system and our Atlantic roto molding facility. Generally, we expect to continue implementing these through 2025, and we should reach a full-year run rate by the end of the year. This timeline may be a bit earlier than the current tranche identified at $15 million. While we might not provide a precise timeframe, I can say that the first tranche should be implemented sooner than the second tranche.

William Dezellem, Analyst

Great. Thank you both.

Grant Fitz, CFO

Yes. Thanks, Bill.

Operator, Operator

We now turn to Nick Toor with BlackRoot Capital. Your line is open. Please go ahead.

Nick Toor, Analyst

Thank you. Just to follow up on the previous question, are any of the cost-cutting measures, the Tranche 1 or the Tranche 2, reflected in your third quarter results?

Grant Fitz, CFO

For the most part, we were really implementing our Tranche 1 initiatives in Q3, so there wasn’t a significant impact on the Q3 results. We expect to see some effects in Q4, and we will continue implementing those initiatives throughout 2025. I would say we’ll begin to gain some momentum from these initiatives, which could potentially offset some of the challenges we have discussed regarding our end markets. Therefore, we need to closely monitor how the markets develop and our progress in accelerating those actions.

Nick Toor, Analyst

Okay, great. Nothing is reflected in your EBITDA for the third quarter, but we should start to see some of those in the fourth quarter. However, we expect the full impact to be felt in 2025.

Grant Fitz, CFO

So that's correct, yes.

Nick Toor, Analyst

Okay, great. And then in terms of your distribution business, if you could just give me a sense of how does that business strategically fit with what you are trying to accomplish in terms of high-grading your portfolio? What is sort of the strategic rationale continuing to keep it as part of Myers?

Dave Basque, Interim CEO

Yes. Distribution is an important part of Myers' heritage. Myers was originally founded as a distribution business, and we are committed to improving that aspect of the company. We are focusing significant effort on this area and have assigned some of our best operations and commercial teams to enhance it. Our main objective is to restore the distribution business to the profitability levels we have experienced in the past and to improve from there.

Nick Toor, Analyst

Okay. I mean, I guess, just one shareholder's opinion, but it just seems, it's a lower-margin business. It doesn't have a secular growth profile. And maybe once you turn it around, it's maybe better in somebody else's portfolio. But just going back to the guidance you guys had given a few quarters back of sort of 10% organic growth profile on the top line, is that sort of still your thinking either generically going forward that, that is the growth profile of the business.

Grant Fitz, CFO

In general, we continue to see strong growth opportunities for our four power brands. Although we face some challenges in the food and beverage segment, we are still optimistic about the growth potential for our Signature, Scepter, Akro-Mils, and Buckhorn businesses, which we expect to expand in the future. There hasn't been any significant change in that regard. However, our distribution business, particularly in the automotive aftermarket, has been disappointing due to this year's declines. We aim to focus on managing costs and enhancing revenue in that area. Nevertheless, we believe that with the right measures in place, our distribution business and Engineered Solutions portfolio will align with GDP-level growth going forward.

Nick Toor, Analyst

Okay, great. That's all for me. Thank you so much.

Grant Fitz, CFO

Thanks, Nick.

Operator, Operator

We have no further questions. So this concludes our Q&A. I'll now hand back to Meghan Beringer for any final remarks.

Meghan Beringer, Director of Investor Relations

Yes. Thank you everyone for joining us today. If you have additional questions or would like to schedule time with our management team, you can contact me. My information is on Slide 16. Thanks for your interest in Myers and have a great day.

Dave Basque, Interim CEO

Thank you.

Grant Fitz, CFO

Thanks, everyone.

Operator, Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.