Earnings Call Transcript - MYE Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Myers Industries 2020 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Ms. Monica Vinay. Please go ahead.

Monica Vinay, Vice President of Investor Relations and Treasurer

Thank you. Good morning and welcome to Myers Industries fourth quarter 2020 earnings call. 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; Sonal Robinson, Executive Vice President of Finance; and Dan Hoehn, Interim Chief Financial Officer. Earlier this morning, we issued a news release outlining the financial results for the fourth quarter and full year 2020. If you've not yet received a copy of the release, you can access it 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 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 the course of 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’m now pleased to turn the call over to Mike McGaugh.

Mike McGaugh, President and Chief Executive Officer

Good morning. Thank you for joining us. I’d like to start the call by expressing my sincere appreciation to our entire Myers team for all their efforts in 2020. I’m especially proud of how well they faced the challenges presented throughout the year due to the COVID-19 pandemic. As a result of their resilience and hard work, we’re able to continue to produce and deliver essential products to our customers. We delivered strong bottom-line results for the year, increasing adjusted earnings per share by 9% from $0.70 to $0.85. Thank you Myers teammates for a job well done over the course of a challenging year. Before we begin with our business update, I want to welcome Sonal Robinson, who joined us as Executive Vice President of Finance in February and will assume the CFO role next week. Sonal brings a proven track record of providing strong leadership in transformational environments, along with considerable experience in capital markets, mergers and acquisitions, and Investor Relations. I look forward to partnering with her as we continue to drive and execute our One Myers strategy. I also want to thank Dan Hoehn for his leadership as interim CFO during the past six months. He did a great job helping us lay a strong foundation and we will continue to benefit from Dan's contributions, as he returns to his role as Vice President and Corporate Controller. Please turn to Slide 3. Before I discuss our performance, I'd like to review our long-term vision, the strategic pillars that we have in place to drive its execution and the progress we've made against those pillars. I introduced the strategy and vision in our October 2020 earnings call, and we are successfully executing against it. To review, we're currently in Horizon 1, which consists of three elements; self-help, organic growth, and bolt-on M&A. Self-help focuses on purchasing, pricing, and SG&A optimization and you're going to hear about a number of strategic steps we've recently implemented along these lines in our discussion today. In terms of organic growth, we are strengthening our commercial capabilities, which includes going to market as one company, One Myers. Our third element, bolt-on M&A, is primarily focused on growing our plastics businesses by acquiring companies that build out our three technology platforms within the material handling segment. We will continue to focus on companies that manufacture durable, sustainable, and/or reusable end products. Once the foundational drivers of Horizon 1 are in place, we will move to Horizon 2 where we will execute larger enterprise-level acquisitions. Our long-term vision culminates with Horizon 3, which is focused on growing the company globally. Our long-term vision is ambitious, but it's well-grounded and focused on building out the technologies and markets that we know well. Granted, it's in the early innings but we are making solid progress. Please turn to Slide 4, which outlines the four pillars that will drive the execution of our strategy, which is to transform our Material Handling segment into a high growth, customer-centric innovator of engineered plastic solutions while we also continue to optimize and grow our Distribution segment. The first pillar focuses on organic growth and addresses four critical areas; sales and commercial excellence, innovation and new product development, sustainability, and eCommerce. Our second pillar, strategic M&A, is geared around bolt-on M&A opportunities that build out our plastics platforms. You've already seen us execute one exciting acquisition in Elkhart Plastics during the fourth quarter and our pipeline of opportunities continues to grow. Core to this effort is our integration playbook that will ensure a world-class approach to acquisition integration. The third pillar, operational excellence, continues the work we've done around continuous improvement while also building out our capabilities in what we call self-help, doing a world-class job in pricing, in purchasing and in internal integration, which is the process of transforming into a single company, our One Myers approach. As a part of this journey, we will also optimize SG&A redeploying our dollars into investments, in sales, engineering, and manufacturing resources. The final pillar is the heart of our company, our people. We are on our way to building a high-performance culture focused on developing our employees and promoting from within, having a culture that's focused on employee safety, on having an inclusive work environment and a culture of servant leadership. We continue to build out our values focusing on integrity, customer focus, optimism, all with a can-do attitude. Our transformation opportunities through our culture are very exciting to me. Please turn to Slide 5, which speaks to our accomplishments so far. In the organic growth pillar, we made significant progress in the second half of 2020, particularly in the area of sales and commercial excellence in eCommerce. Our Vice President of Sales and Commercial Excellence, Jim Gurnee, launched our new commercial structure that standardized and strengthened our focus in sales, marketing, and product management. These elements will become critical parts of how we run our business. Jim also launched a new sales training curriculum focused on growth. This program will help our team improve their ability in cross-selling and in growing the new One Myers approach. One of the more meaningful parts of today's discussion is the new and more aggressive approach Myers Industries is taking to eCommerce. We believe that eCommerce will be a compelling channel for the future, and we believe that Myers is well suited to capitalize on this trend. Just last year, in 2020, eCommerce sales grew more than 30% from our 2019 base. We achieved this growth with what was largely a Skunk Works type project. In order to turbocharge eCommerce at Myers, we've now stood up an independent focused organization to spearhead this channel of the market. The eCommerce business will be led by Chad Collins, who was previously the President of our Akro-Mils and Jamco business units. Chad also helped develop our original relationship with Amazon for that business. Sales in the eCommerce channel for 2020 approached 5% of our total revenue. Our goal is to double that by the end of 2023. This is an ambitious target, but one that we believe is attainable. As I noted earlier, we're well underway with our strategic M&A pillar, having strengthened our portfolio with the acquisition of Elkhart Plastics in November. As a bolt-on acquisition within rotational molding, Elkhart fits perfectly into our strategy and our developing culture. Through this combination, we welcomed 460 new members to our team, seven U.S.-based manufacturing facilities, and approximately $100 million of annualized revenues. The integration of Elkhart has gone smoothly. It has been instrumental in helping us further advance our integration playbook and our deal flow. We continue to build out a healthy funnel of potential acquisitions. Next, I'd like to talk about our accomplishments in the third pillar, operational excellence. Last month, we announced that we've consolidated our Material Handling businesses into three distinct technology platforms; injection molding, rotational molding, and blow molding. We believe that we are unique in having strength in all three of these core molding technologies. We strengthened our injection molding capabilities by combining Akro-Mils, Jamco, and Buckthorn into one collective team. We've done the same in rotational molding by merging Ameri-Kart with our recent acquisition Elkhart Plastics. Our third technology platform, blow molding, is currently comprised of our Scepter business. This platform has tremendous opportunity for both organic and inorganic growth. By combining Akro-Mils, Jamco, and Buckthorn into a single platform, and by combining Ameri-Kart and Elkhart Plastics into a single platform, we will be able to streamline our SG&A investments and overhead and redeploy these dollars into sales, engineering, and manufacturing. As larger units with more scale and reach, these platforms will be more robust and will be able to deliver more innovation and more value to our customers. We're excited about this change in approach and believe it moves us forward in Horizon 1, enabling growth while also managing costs. One last piece I'll mention on pillar three is that we consolidated our purchasing function and created a single centralized purchasing team across the company. This new approach allows us to aggregate our purchases and become an easier company to do business with. Longer-term, this should help us negotiate a more secure supply position and a more competitive cost position. Moving to the last of our four pillars, in order to execute and achieve breakthrough performance, we need to have a high-performing culture. One of our noteworthy achievements this year is goal alignment. In order to ensure that we are collectively focused on achieving company-wide success and fully executing our One Myers strategy, we replaced multiple legacy bonus plans with a single plan centered on one performance metric, adjusted EBITDA. We believe this new one team approach will drive alignment, unity, and will help us deliver solid results in the future. We also added talent in a number of leadership positions in our business. Most recently, on Tuesday, we announced the addition of Paul Johnson to lead our Distribution segment. Paul brings 30 years of leadership in the automotive and auto aftermarket industry, which includes a recent role as the President of International Brake Industries and prior leadership positions with Federal-Mogul and General Motors. I believe Paul is the right leader to build, grow and take this business forward. I'd also like to thank Chris DuPaul for his hard work and successfully running this segment over the last three and a half years. Chris did an excellent job of leading the recent transformation of the Distribution segment, which led to sales growth and improved profitability. I'd like to wish Chris well as he pursues the next chapter of his career by returning back to his roots in healthcare. Finally, two dynamic leaders with significant transformation and growth experience joined our Board in February, Yvette Bright and Jeff Kramer. I've already had a chance to see both in action this quarter and look forward to their ongoing counsel and leadership. As you can see, we've made a lot of good progress against our strategic initiatives. We still have a lot of work to do, but I'm pleased with what we've been able to accomplish in a short time. Now, turning to our fourth quarter performance, which starts on Slide 6. I'm pleased with our results for the fourth quarter, all things considered. In spite of several manufacturing plants being impacted by the COVID surge in mid-November and December, we were still able to finish the quarter with sales up 8% on an organic basis and 18%, including contributions from the Elkhart acquisition. Top-line organic growth was driven by continued momentum in the RV, auto aftermarket, and consumer end markets. We also saw demand improvement in our industrial and automotive markets, which gives me confidence that an economic recovery post-pandemic is on the horizon. During the quarter, we experienced rising raw material costs and an unfavorable sales mix, which impacted our gross margin. The raw material increases that began towards the end of 2020 have continued and accelerated into 2021. Specifically, we have seen significant increases in resin prices as a result of tightening supply on the U.S. Gulf Coast. In response, we announced an 8% price increase across a broad portfolio of our products, primarily in the Material Handling segment, which was effective March 1, 2021. Please know we will continue to be vigilant about managing our pricing actions throughout the year to offset these unprecedented cost increases. In addition to cost being a headwind, the recent freeze on the Gulf Coast has had a significant impact on the short-term supply of polyethylene and polypropylene. Certain grades of resin continue to be tight, and we're working closely with our suppliers to secure materials to ensure that we can continue to meet the needs of our valued customers. As we enter 2021, we have solid top-line momentum, balanced with near-term headwinds I just spoke to. While a majority of our top-line growth will come from the Elkhart acquisition, both volume growth and pricing will also contribute. We expect organic sales growth across most of our end markets as a result of the continuation of the demand trends in select end markets and our enhanced focus on our sales capability and eCommerce. Sonal will provide more detail regarding our annual outlook, which includes both sales and EPS guidance. Before I turn it over to her, I'd like to reiterate that our One Myers strategy is working. We are rapidly driving significant change in our organization and our capabilities to ensure that we execute our Horizon 1 of our long-term strategy and create and deliver long-term shareholder value. With that, I'll turn it over to Sonal.

Sonal Robinson, Executive Vice President of Finance

Thank you, Mike, and good morning, everyone. Let me begin by saying I'm delighted to be joining Myers at this inflection point in the company's history, and I look forward to working with the team to drive and execute our long-term strategy. Turning to fourth quarter results on Slide 7. Net sales were up $21 million, an increase of 18%. On an organic basis, net sales increased 8%, excluding the impact of the Elkhart acquisition. Increased sales in both Material Handling and Distribution segments contributed to growth. Adjusted gross profit was up $1.2 million, while gross margin decreased from 33.6% in the prior year to 29.4% in the quarter. Margin was negatively impacted by an unfavorable price to cost relationship, repairs and maintenance, employee benefit costs and an unfavorable product mix. The addition of Elkhart benefited profit but impacted gross margin unfavorably due to product mix sold. As a reminder, we are targeting $4 million to $6 million in annual cost synergies over the course of the upcoming two years. Adjusted operating income decreased $700,000. The increase in gross profit was more than offset by higher SG&A expenses, mostly due to the addition of Elkhart. Adjusted EBITDA was $11.3 million, a decline of $1.6 million compared to the prior year. Adjusted EBITDA margin was 8.2%. Lastly, adjusted EPS was $0.11 versus $0.12 in the prior year. Turning now to Slide 8 for an overview of segment performance in the quarter. Beginning with Material Handling, net sales increased 26% or 10% on an organic basis. Excluding Elkhart, sales in the food and beverage and vehicle markets were up double digits driven by increased sales in seed boxes and in the RV, marine and automotive end markets. Organic sales in the consumer market were up high-single digits due to fuel container sales, while the industrial market was flat. Material Handling adjusted operating income was essentially flat at $9.1 million as the impact of higher sales was offset by unfavorable price to cost relationships, repairs and maintenance, employee benefit costs, and an unfavorable product mix. In the Distribution segment, sales increased 4% driven by increased sales of equipment and consumables, partially offset by lower sales of tire repair products and advanced traffic marking tapes. Distribution’s adjusted operating income increased 13% to $3.6 million, primarily as a result of higher sales. Turning to Slide 9. Fourth quarter free cash flow was $10.7 million, an increase of $7.8 million, reflecting an increase in cash provided by operating activities, including the benefit of working capital net of deferred taxes. During the quarter, the company utilized approximately $63 million in cash to fund the Elkhart acquisition. Cash on hand at year end was $28 million. Based on our trailing 12-month adjusted EBITDA of $66.4 million, leverage was 1.2x. Let me conclude my comments with additional color on our outlook for 2021. Turning to Slide 10. Net sales are expected to increase by mid to high 20%, including an incremental 10.5 months of sales related to the Elkhart acquisition and the expected impact of the March 1 price increase. As a reminder, Elkhart's annual net sales at the time of acquisition were approximately $100 million. Continued momentum in RV and marine business along with a rebound in industrial and automotive-related revenues are expected to drive growth. As a reminder, fuel container sales in 2020 were unusually strong due to one of the most active hurricane seasons on record. Overall, commodity costs are projected to be higher driven by increases in resin costs. As Mike mentioned, the company announced an 8% price increase primarily across the Material Handling segment effective March 1. Higher cost versus price realization is expected to compress margins in the first half of 2021. Our teams continue to stay close to the changing market dynamics, including the need for additional pricing actions. SG&A expenses are expected to approximate 24% of net sales benefiting from larger scale. The low operating income, we are projecting approximately $4 million of interest expense and an effective tax rate of 26%. Our guidance reflects a weighted average share count of 36.5 million shares. Taking all of these assumptions into account, we expect adjusted EPS to be in the range of $0.90 to $1.05 per share. Other key assumptions impacting EBITDA and cash flow include depreciation and amortization expenses of approximately $23 million and CapEx of approximately $15 million. CapEx is expected to trend higher than past years given our renewed focus on investing in our facilities. In closing, let me reiterate that our One Myers vision is gaining momentum as we continue to execute against our strategy and strengthen the building blocks to drive long-term growth. With that, let me turn the call over to the operator for questions. Thank you.

Operator, Operator

Thank you. First question comes from Steve Barger with KeyBanc Capital Markets.

Steve Barger, Analyst

Good morning, everybody.

Mike McGaugh, President and Chief Executive Officer

Good morning.

Sonal Robinson, Executive Vice President of Finance

Good morning.

Steve Barger, Analyst

I'll start with the sales growth. Sonal, as you mentioned, $100 million run rate. So if that translates into a high $80 million in 2021, it seems like organic growth will be high single-digit. Can you talk about that across the segments? Do you expect higher organic in Material Handling given the easier comps and the price increase?

Sonal Robinson, Executive Vice President of Finance

Yes, you will see organic growth in both segments. To clarify the top line growth, the high 20% growth includes about 18% from the acquisition of Elkhart, which leaves a high single-digit growth from organic sources. Of that organic growth, around half will be related to volume and pricing, with a slightly stronger emphasis on volume at the upper end of the range. This growth will be reflected in both Material Handling and non-pricing-related growth in Distribution.

Steve Barger, Analyst

But you would expect higher organic in Material Handling. Is that correct?

Sonal Robinson, Executive Vice President of Finance

Right.

Steve Barger, Analyst

Okay, got it. And just based on the guide, the incremental margin for the year seems to be single-digit despite what's obviously a nice revenue increase. First off, is that primarily because of price-cost, or why won't you get better pull-through? And then just second part of that question, what do you think this model should generate for an incremental margin over time?

Mike McGaugh, President and Chief Executive Officer

So, Steve, I'll take the first part and have Sonal take the second part of that. It is price-cost. The demand is there for the product. We can see the economy recovering, which is a good sign. Across the board, we're in a number of markets that are experiencing good demand. The curveball is, as the economy started to heal, a lot of the resin producers either delayed turnarounds during the pandemic and they had to catch up on that, or with the kind of yield you saw snap back in your resin pricing in the fourth quarter, and that's continued in the first quarter, which we could have weathered quite well, the exception being is when the freeze hit and you had many of those producers went on force majeure and allocation, it just exacerbated it. So for sure the drop-through or the lack of drop-through is not where we would want it to be steady state. But it's all price-cost, it's all price-cost and it's a short-term Street issue down the Texas Gulf Coast.

Steve Barger, Analyst

And the longer-term incremental that you expect?

Mike McGaugh, President and Chief Executive Officer

Sonal, what does your model have?

Sonal Robinson, Executive Vice President of Finance

So, looking ahead, our primary focus right now is on recovering those costs. We expect volume to positively impact margins, but we haven't provided a long-term margin guidance at this time.

Steve Barger, Analyst

Yes, I understand that. But you have a pretty aggressive goal out there to get to a $1 billion in revenue by 2023. And a lot of that, of course, will come from acquisitions and that can skew the incrementals around. But can you just give us a general idea of as you enter into this longer-term organic versus M&A growth paradigm, just how do you think this model should flex?

Mike McGaugh, President and Chief Executive Officer

Steve, the overall target on EBITDA is 15% on that $1 billion base. What I'll also do is look to see if Dan wants to add any color on. Dan's in the room as well.

Dan Hoehn, Interim Chief Financial Officer

Yes. Certainly, short-term there is going to be some uncertainty around the resin pricing and how we get to that $1 billion is just the timing of when we achieve that 15%, because that's the long-term goal.

Steve Barger, Analyst

Okay. For the 8% price increase, is that strictly based on the input costs or is there some value pricing component in there? And I just asked because I know that improving your pricing strategy has been a big focus of the early pillars.

Mike McGaugh, President and Chief Executive Officer

Yes, Steve, good question. I would say our expectation is to cover the increase. And if the opportunity presents itself to expand margins, obviously we will capitalize on that. My belief is that we need to watch how this resin market unfolds. Polypropylene has gone from $0.40 to $1.35. We need to watch how the market unfolds and figure out do we need to go back and move price subsequent times. That's what I referenced in my comments. We're watching it day by day to determine what additional pricing actions we need to take. And as we identify those, Steve, we will move very swiftly.

Steve Barger, Analyst

Understood. Thanks.

Mike McGaugh, President and Chief Executive Officer

Thank you.

Operator, Operator

Thank you. Next question comes from Tim Wojs with Baird.

Tim Wojs, Analyst

Hi, everybody. Good morning and welcome, Sonal.

Sonal Robinson, Executive Vice President of Finance

Thank you. Good morning, Tim.

Tim Wojs, Analyst

Maybe just kind of starting back on the pricing side of things, just the increase that you put out into the marketplace, could you just remind us how we should think of that in terms of just kind of the ultimate realization of the 8% and how that kind of phases into the model for the course of the year?

Mike McGaugh, President and Chief Executive Officer

We are experiencing strong acceptance of the price increase. Our customers are aware of the developments in resin and are supportive of the change. I feel confident about the 8% increase. While it won't be fully realized everywhere, it is a solid increase overall. The timing is urgent, and we are quickly implementing these pricing adjustments, which took effect on March 1, except where contracts obstructed it. Prices have indeed gone up. However, we remain cautious due to the ongoing Gulf supply situation, with producers still working to bring their units online. We are trying to understand how this will affect the short-term supply and demand balance. Now, I’d like to turn it over to Sonal, who has quickly acclimated to our current situation, and I am very impressed with her insights. So, Sonal, please take it from here.

Sonal Robinson, Executive Vice President of Finance

Thank you, Mike. So, Tim, maybe to add a little more color to that commentary, as I indicated, as you think about our high single-digit top line organic growth, about half of that coming from pricing. That kind of gives you a sense for what we would expect as of now in terms of top line growth. In terms of the cadence throughout the year, clearly, we announced at March 1, so there is sometimes a delay as you see that starting to flow through our orders and what we're going to recognize. And so you're going to see, I would say, a larger impact as we go into Q2, Q3, and Q4 related to the pricing actions rather than what you may see coming through Q1 just given obviously timing and flow through.

Tim Wojs, Analyst

Okay, that's helpful. And then on the M&A pipeline, Mike, could you just talk a little bit about the opportunities and maybe how that's built over the last six months since you've outlined that strategy and just kind of the internal capacity for incremental M&A at this point?

Mike McGaugh, President and Chief Executive Officer

Yes, absolutely. Tim, it's similar to what we discussed in the past. We want differentiated products, not commodity products; ideally products that are reusable, durable, sustainable, or we can put a high percent of post-consumer resin in there. I think that aligns out with our direction from a sustainability standpoint. I will say the Elkhart acquisition has been successful. The targets that we've got line of sight into we believe are solidly, but they're going to pan out. Because that's gone well, I think it's also improved a little bit of the buzz in the market. We are indeed or will become the acquirer of choice in some of these businesses, particularly founder-owned businesses. And what that means, Tim, is our inbound calls are increasing. Not only are we still doing a lot of outbound, but our inbounds are increasing as well. Pipeline is really solid. There's a lot of founder-owned businesses there are quality businesses out there that are multiple, similar to what we transacted Elkhart at, that are accretive on day one. And we're going to continue to do these bolt-ons for specific technologies and specific markets and really to become a well-oiled machine on how we integrate. And then about that time, we'll be ready to move into similar transformational deals and we'll have the balance sheet and the income statement to support that and the cash flow to support that, but that's 24 to 36 months out.

Tim Wojs, Analyst

Okay, that sounds great. And then you just mentioned in your last comment, but this is my last question, how are you kind of thinking about the overall debt structure going forward? I know you have '21 notes that are due this year. And so how are you kind of thinking about addressing those, but then also potentially addressing kind of the longer-term capital structure?

Mike McGaugh, President and Chief Executive Officer

Tim, what I'll do is I'll ask Sonal to respond to that.

Sonal Robinson, Executive Vice President of Finance

Yes. So, Tim, clearly in terms of supporting our long-term growth strategy, the vision, getting that capital structure right and flexible, quite frankly to support that need is one of the key priorities. But specifically, near end in terms of the notes that came due here in January, we did pay those off with the combination of cash on hand and the revolver, and so that is behind us as we think about that. Currently, the team continues to be very focused on what that capital structure looks like as we look at the capacity under our revolver and also future activities.

Tim Wojs, Analyst

Okay, sounds good. Thanks for all the color and good luck.

Operator, Operator

Thank you. We do not have any further questions at this time. And this does conclude today’s call. You may now disconnect.