Myers Industries Inc (MYE) 2016 Q2 法說會逐字稿

Greetings and welcome to the Myers Industries second-quarter 2016 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Monica Vinay, Vice President, Investor Relations and Treasurer. Thank you, you may begin, Monica.

Thank you, Jerry. Good morning. Welcome to our second-quarter 2016 earnings call. Joining me today are Dave Banyard, President and Chief Executive Officer, and Kevin Brackman, Vice President, Corporate Controller and Interim Chief Financial Officer.

Earlier this morning we issued a news release outlining the financial results for the second quarter of 2016. If you have not yet received a copy of that 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 there along with a transcript of the call shortly after this event.

Before I turn the call of her to management for remarks 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 filings.

I am now pleased to turn the call over to Dave Banyard.

Thanks, Monica, and good morning everyone. Thanks for joining us.

I'm going to start on slide 3 with a summary of our second quarter. The quarter came in below our expectations on the top line. It did come in where we thought it would on the margins.

But talking about sales we were down 12%. 11% of that was organic, 1% due to currency. And while we highlighted in the first quarter that we thought that the second quarter would be a tough comp year over year, our results are worse than what we had expected.

The main driver of that is the difficult capital spending environment in several of our key markets. And I'm going to go into more detail on that in a later slide.

On the margin side we were slightly up year over year, a similar dynamic to what we saw in the first quarter with good operational discipline and lower input costs. We have done some product line rationalizations and some operational improvements that have contributed to a stronger margin.

Earnings per share were at $0.19. Adjusted earnings per share from continuing operations at $0.21. And our free cash flow was down slightly year over year mainly due to capital spending, and I'm going to get into more detail on that later as well.

Let's go to the next slide. Slide 4 is our GAAP income statement. You can see at the top the impact of our sales and our gross margin.

A couple of things I wanted to highlight on this slide in the SG&A and impairment charges we did have two one-time charges during the quarter. One was for the impairment related to the exit of a product line and the other was an increase in our environmental reserves that shows up in our SG&A. You can see on the operating line a margin of 7.7% which is in line with what we saw in the first quarter.

If I could switch to slide 5 now and talk about our adjusted income statement, a couple of points on here and the adjusted SG&A was down a bit year over year. Most of that is from lower employee-related costs.

And you can see here our adjusted operating margin here at 8.1% and that's in line with what our expectations were. If you think about it, it's about 27% flow-through on the revenue decline, so not bad considering our 31% gross margin.

Going down to the bottom, $0.21 on the adjusted earnings from continuing ops. And we had about $20.5 million of adjusted EBITDA which is in line at similar to what we saw in the first quarter.

Move on to slide 6 now and we will talk about the balance sheet and cash flow. Up in the upper left, the balance sheet, very similar to the first quarter, we did pay down a little bit of debt in the second quarter. Looking down at the lower left and cash flow, really the highlight on here is the capital spending is slightly higher which is resulting in a slightly lower free cash flow year to date.

I want to highlight on that that this is as I mentioned in the first quarter a similar dynamic where a number of these projects were projects that were begun in 2015 and carried on through several months. So the 2016 run rate is a much lower in capital spending and we expect that new run rate to continue throughout the year. And we've highlighted in our appendix our new expectation for capital spending for the full year.

If you move over to the right side talking about our working capital, this is an area that I'm disappointed in our performance here for the quarter. I'm going to talk a little bit about a couple of the details behind it, but we did improve in accounts receivable and inventory. The largest part of this move here is in the accounts payable line.

If you go back to what I said in Q1 one of my goals this year is to get our working capital to be less choppy and it's been very choppy as we go from quarter to quarter. I think that's because we haven't been sustaining process improvements.

We've made some moves in that direction throughout the quarter. I think we've in some ways perhaps overcorrected a bit on the accounts payable side and you're seeing that in this number. We still have some work to do here.

My goal is to come out of the year with a normalized working capital each quarter. And so we're seeing a little bit of a choppiness still. But we're working very hard on the right process improvements, improving our terms with our suppliers, and that's going to show up as we move forward through the year.

Next slide. On slide 7 I'll spend a little bit of time here talking about each of our individual segment results. From a top level both of our businesses were down about the same amount.

I will start over here on the left with material handling. Sales down 12% on an organic basis. Really the majority of that and a large driver is that is the capital spending environment in a couple of our key end markets.

Behind that, as I mentioned earlier we did expect a little bit of year-over-year decline in that but the market dynamics are worse than we expected. And really the main driver of that, particularly in the food and ag markets, has been the supply situation in those markets. The commodity prices are lower because of the large supply.

As you look at the ag markets there is a lot of the indicators point towards a pretty good crop this year which will continue to exacerbate that problem. So our specific customers are under a lot of price and, excuse me, under a lot of spending pressure and that's affecting our business. They are not ordering material really in a lot of their different, from a lot of their different suppliers and we're affected by that.

On the beverage markets we have known for a while that that market is going to be down. We had that built into our expectations. It really did come in about where we thought but it is a large number.

And that's mainly in our Brazil business where we have a large customer that hasn't been ordering. We have seen some orders start to come in the second half, which is exactly what we'd expected. But still on a year-over-year basis it's a lot more muted than we've seen in the past.

Moving on to the consumer business it was a bit softer than expected. A couple of different dynamics going on there. The consumer spending indicators are stronger than what our performance would make you look at, but a couple of things that affect us.

One is that we have done some product line rationalization within that business, some unprofitable products. And that's still coming out of our revenue. But also from a mix standpoint we did see a number of lower price products sold in a higher volume than we had expected, and so that contributed to our softness there.

On the good side we have seen some good wins in our vehicle markets, particularly in automotive and also in RV. And, unfortunately, some of that we're seeing looking forward that perhaps the auto market is slowing a bit, but we have done well there this year. It's just not quite enough to make a dent compared to the downdraft we have seen in the capital spending in our ag and food markets.

On the industrial side that business, the market itself has been very choppy throughout the year and I mentioned that in the first quarter. And we saw more of that in the second quarter and a little bit of a decel in the second quarter in the market itself. But we've done a good job there and had some nice wins and been able to hold our own there.

So we're happy with the performance there. But, again, we're coming in flat where the market is down. So it's a win, but it's not enough to overcome the softness we see elsewhere.

Moving over to the distribution side, there is a similar dynamic. It's for different reasons but we're experiencing a bit of a similar dynamic.

So typically in that market you see a seasonal uptick in the second quarter. That didn't happen and we spent a lot of time in the field in the second quarter looking at the pace of business, at our customers, at a lot of the smaller tire dealers and tire repair stores. And the first reaction that you see when the business is slowing is that they slow down the capital spending we did experience that in our equipment sales in the second quarter with the biggest part of our decline here.

There are some good leading indicators for this market. Miles driven are up, fuel prices and so forth. So we're expecting a good summer from people driving their cars, but it hasn't shown up in people going and changing their tires in a higher way than last year.

So we didn't see that uptick that we normally see in the second quarter. And that hurt our business there.

The retread markets continue to be slow. And we did have some wins in the first quarter but most of that volume won't come until later in the year.

And moving down the list here, I mentioned before that we were working on a sales -- we made a lot of progress in the second quarter, but we still are being affected a bit by that. But I think we've moved the needle quite a bit in the second quarter towards the performance that we're looking for but it's a long process and it's not something that's going to happen overnight. So we did make progress but it still affected our top line in the quarter.

A couple of nice wins highlighted here at the bottom both of which, again, at this point are still fairly small. But they are helping us focus on where we are going to go try to win.

Shift to the next slide, slide 8, we'll conclude by talking about our outlook. And I wanted also spend a little bit of time updating you. Did a lot of work on our strategy in the second quarter and I wanted to update you on some of the things we found there.

Turning to the outlook, based on our second-quarter results plus based on what's going on in really our big and key end markets, we're lowering our outlook. We now expect full-year revenues to be down mid to high single digits. The main driver of that is capital spending.

Really it's hard to see a catalyst, particularly in the commodity markets, a positive catalyst. It is going to change the current dynamic in capital spending there. So we've taken our viewpoint of the future down because of that.

We do have, as I mentioned just a minute ago, we do see some mixed indicators in the distribution segment. It doesn't really change our view on what we're going to do there. We're going to continue to really work hard at improving our sales performance there and we're going to work through whatever market challenges we see there, but there's most likely similar challenges on the capital spending side there, as well.

Spend a couple of minutes here on our strategy, what we accomplished in the quarter. We did accomplish quite a bit, particularly at the business unit level and I'm very excited about a lot of the work that the teams have done. We did a lot of strategic marketing work and coming out of the quarter I think we better understand where we're winning and where we're losing.

More importantly, I think we understand why. And once you understand that you can really do something about it. The teams have all identified key initiatives and process improvements and those are really cross-functional process improvements.

And there is both operational customer service, commercial type process improvements that are all wound together in these initiatives. And it's really helped us focus on where are the spots that we think we are going to win and where do we need to improve where we're losing.

A couple of themes that I wanted to share with you that came out of this process. I've said it before, it's a theme that I could tell from early on in my tenure here but it came out very strongly in our planning process, commercial execution and putting good process in place around the entire commercial part of the organization is going to be a critical part of moving forward.

I think we really learned that early on in the distribution business and we're making a lot of progress there. But other businesses within our portfolio have seen that and started taking that to heart and putting those in place. I think the strategic marketing work that we did was a great first step in teaching people within the organization how to think about commercial execution.

Additionally, a couple of new things coming out of this, the themes that I saw throughout each of the discussions with the different general managers, protecting the core is about being successful at what got you where you are. So going back and making sure that we're protecting the business that we have today and winning more of that and selling more of what we have, that came out in a lot of things. And simplify was another common theme.

And that's been started a while ago with a couple of different moves within the portfolio. But I think that folks as they took a look at their strategies and the businesses realize we still have a ways to go on that. And there's more that we can do to simplify our business and be more focused on how we can serve our customers better.

In terms of next step, given our current economic environment in the markets around us as we looked at these strategies and the initiatives that we have we're moving up the priority on the things that we think can have a tangible benefit to our cost structure so that we can protect the commercial investments which often take a bit longer to show results.

With that we're open to questions.

(Operator Instructions) Adam Josephson, KeyBanc Capital Markets.

Thanks. Dave, Monica, good morning. Dave, just a couple of clarifications, just one on consumer sales.

Can you just talk a little bit, I think you talked about selling more lower margin products, but if you can help us better understand that a bit that would be great. And similarly, on the equipment side of your distribution business can you just talk about what you think the weakness was there?

Sure. So maybe a clarification on the consumer side, not lower margin products per se but lower price. So a cheaper version, if you will.

It's a combination effect of when we went to market through last fall, which is the big buying season, we had new products that we wanted to sell. We launched them late which we've highlighted before, I'm not going to rehash all that. But if you think about the shelf space and what got filled in, what ended up getting filled in were lower-priced products.

So the margins weren't terribly off. It was more about lower priced type products. It's more of a mix issue from that from the top line rather than the bottom line.

But it does lower both. It's getting lower dollars. So that's more the dynamic there.

Honestly, we thought we would see a better, given the current consumer indicators out there, we'd thought we'd see a better market for this in the spring and we didn't. So we're adjusting to that.

I think we're also a couple of points on the business as a whole, the founder did retire this spring. We brought in a new President and he's off to a great start and really been laser focused on how we can set ourselves up for this next coming season better than we did last year. And we're really excited about that.

So that's our focus right now with that business is to make sure that we have the right products positioned the right way coming into the winter and next spring season. This is the time that you are starting to think about that stuff.

Related to the capital spending in the distribution side, the dynamic there is, again, if you think of our customer base it's a pretty broad view of different types of shops. And the capital spending there often is driven by sentiment, how those people are feeling. So if their bays are not full and they are not feeling like there's a constant steady state of business they are probably going to push off any kind of large expenditures.

I think that's the dynamic we're seeing. Because as we went out and we've been spending a lot more time with what we think are our better salespeople to really get a gauge from them on market and then we're working on our sales force initiative on the underperforming sales people to improve their performance, but from the people that are high performing salespeople, they did see a lower-than-expected seasonal level of activity in a lot of our key independent tire repair stores. And to me that's a huge indicator as to why we didn't see the normal level of capital spending we saw in that market.

Dave, thanks. And just one clarification on the consumer side. Can you just give us examples of some of the lower-priced products just so we can better grasp on to what you're talking about?

Yes, it's going to be more of the legacy products that we've had before. So we price our products to be the newer products are we think add more value. And so those are going to be priced differently than the other set of products we have.

We still think we have a better product than the competitor. But at a certain point you've got to start competing on features. And that was our game plan coming into the year and because of our how late we've launched those products we weren't really able to get the traction we wanted with the products that had the new features.

I think they still do have good staying power in the market. And we're building a new strategy around what we have in terms of new products for next year in that regard.

Thanks, Dave, and just two others and I will get back in the queue. One is Brazil. Can you just tell us broadly what you're experiencing there, just you're in a couple of businesses there?

Yes. I'd say Brazil actually came in pretty close to what we expected. It's not great, but I'm not going to try to say, hey, it's stabilized down there or anything like that. But we've gotten I think better clarity on where we stand down there.

And part of that is also we had a leadership change down there, as well, early in the second quarter. The dynamic there that, particularly for things that you look at, you can't really take what's the demand level for beer in the short term or for soft drinks in the short term because the spending level was literally shut down. And so, and they told us that but the first quarter they basically said we're not going to be ordering crates in the beverage markets.

And so we are now seeing they've made good on that and now they are starting to place some orders but it's more muted. So I don't know that there's any, again, real uptick in there in things but maybe that's stabilized.

Elsewhere in the market there's some activity. I think part of that was that there was some pent-up demand from people just not knowing when you have a big political turmoil like they had back in the early part of the spring. I think people just wait. And so we saw a bit of that in things like automotive and manufacturing.

And so I don't want to say things are picking up. The economy is still not doing well down there. But we are seeing some activity and we're delivering product.

Sure. And just one last one before I get back in the queue, Dave, just you started in this role in December. Can you just talk, it's been seven months or so, can you just talk about what's been positively surprising to you, what's been what would have been the negative surprises? Presumably economic activity domestically and in Brazil are the most likely negative surprises, but can you just talk about what's been different than your expectations thus far in the job?

Sure. I mean, I don't think in terms of the Company and the job I don't think it's very similar to what I expected. So we're a small, in your all's world we're a small manufacturer and I think the challenges we have are similar to companies of this size.

So nothing internally is a surprise to me. I think that at the beginning of the year or, let's say, more towards the tail end of 2016 and even, frankly, a lot in the first quarter there's been a bias in the market and the world that we would see we would start coming out of some of the commodity down pressure that's been around for the past few years.

And the inventory levels and the supply glut has continued and that's probably been, and you see that in a lot of the various end markets and that's been talked about a lot since the beginning of June. And so that's a bit worse than I think any of us expected. And so we've learned a lot about our interaction.

We spent a lot of time in the second quarter as part of our strategy process really learning the buying dynamic and the value add that we provide to people like the seed companies, food processing companies and so forth. So we know a lot more but, unfortunately, what we know is that when times are this bad they really do stop spending. So we've just got to be prepared for that because that's the reality of our situation.

Thanks very much, Dave. I will get back in.

Chris Manuel, Wells Fargo Securities.

Good morning. Dave, I wanted to -- I appreciate the color on slide 8, the couple of bullets here on a strategic update. But to follow along the theme that Adam just spoke off, you've had about seven months now at the helm.

I'm confident that you've developed quite a bit more with respect to strategy and vision and what you think Myers can look like down the road or a path. Could you perhaps share with us some of what that vision is, whether is it do you want to be a technology driven Company? Do you want to be a process or a new product driven Company or what do you view some of the future might look like as Myers Industries?

Or perhaps maybe share with us when you might be prepared to share some of those items with us, maybe financial milestones, etc. How should we think about the process?

Chris, it's certainly a fair question. It's premature at this point.

And let me, I will give you an answer that is the second part of your question which is my goal and plan is to have by the end of this year to be able to explain to you where we're going. And it's not that I'm not working on this, it's there's a process to it. So I've come out of the second quarter and what I've highlighted on this at the tail end of the presentation is I have a much better understanding now of our end markets.

That's what you've got to do first. You've got to understand the markets and where we're strong, where we need to work on. So we've made a lot of progress on that and I think if you would talk to anybody within the organization they would say the exact same thing.

So we're learning how to be to be good at marketing. It's not a skill we've had in the past so that's a starting point.

But then there is a lot more to an enterprise strategy and there's a vision to it. And, obviously, I'm forming opinions in my mind, but there's a lot of work to be done with the Board in terms of what we want to be and how we're going to get there and we're not through that yet. So it would be premature for me to put anything out there beyond what I've put out just now.

All right. Maybe just one more question kind of along those lines before I switch gears, but as you look at the current portfolio today, how do you feel about it?

Are there parts or pieces that you may say, boy, I really like this but I want to go deeper or do more with? Are there parts that you struggle with fit or how do you (multiple speakers)

Whenever you have a diverse business there's going to be both for sure. I'm hesitant to be very specific on some and the reason for that, I'm not trying to be shifty, but we are a small Company and some of our markets are small. So it's going real specific on strategic initiatives around niche markets that we have is not something I'm going to do now or in the future.

Because I'm giving that away for free to our competition and that's not what we're going to do. We've done all the strategic -- we've put a lot of effort into strategic marketing and I don't want my competitors to just have it. But, yes, there are areas, a couple of -- I will share couple of things with you.

There he and when you do deep strategic marketing work you very often confirm hunches that you have, whether that be hunches about the competitive dynamic in a particular market segment or your place and competitive position there. And we have confirmed a number of things that I think we thought were true but didn't have the conviction around and when you have conviction around something it's really, it makes it much more powerful to be confident to go invest in it.

And that, if that's the biggest thing that came out of our Q2 strategic plan for our teams that's going to yield some great results in the future. And there are a few of those. In particular, and I've said this publicly and I'll say it to you now, I think our distribution we have great opportunity there and from the work that we've done and from the work that I've seen our team put together I don't have any change in my view on that.

Okay, that's helpful. Thanks. Just two other themes.

First is granted this has been a kind of choppy quarter and you talked about how some things have played out. Do you feel that through time the business can become more consistent or will it always be sort of a business that some pieces are doing well, some pieces aren't and it's rare to see it hit on all cylinders. How do you think about the business becoming consistent on an ongoing basis?

That's a fair question. I think that process is a good way -- so there's two different pieces to that. There's the external piece, are we in markets that allow for some consistency and are we consistent in executing?

And that's the way I think of the two of them. So my focus right now, I can't do a lot in the short term to change what markets we're in, so I'm focused on helping ourselves internally be as consistent as we can. And that means it does have a market effect because you have to understand what's going on in your market so you can react and have process to react.

And that's what we're working on right now. The future state, of course, you want to look and say where are we advantaged in markets that will help us be more consistent over time. I think generally if you're going to be in industrial you are going to see a cycle, there is a cycle to every business.

And you can -- I'm not a person that sits here and says hey, you're going to try to line up countercyclical, this, that and the other thing, I think 2009 proved that when things go down everything goes with. So I don't -- I'm not trying to look at the world from that perspective. But, yes, there are certain ways of finding opportunity that allow you to be a little more consistent, but I'd bifurcate the two.

Okay, that's helpful. Last topic is the CFO search.

Can you give us perhaps an update on where you are? Do you anticipate having somebody in place by next quarter or rough kind of thoughts there?

Yes, sure. We have several strong candidates in the pipeline. The process is moving at the pace that I expected it would.

I'm not going to put a due date on it because there is a dynamic, it's just not, that's not worth its while, that's a guess. So but the process is moving at the pace that I expected it.

Okay, thank you. Good luck.

Thank you.

Brian Sponheimer, Gabelli & Co.

Hi, good morning David, good morning Monica. Maybe if I can ask the strategic question a different way, and I think that they were really well done so far. As you're thinking about how your timeline develops over the course of the next six months, 12 months, 18 months, what are the steps that you think that you're really going to be able to put your footprint or your thumbprint rather on this business?

That's a good question, Brian. And not that the other ones weren't. They are all good questions but this one I will answer.

The biggest thing I can do is prioritize and then put the focus on where we have the best opportunities to make a difference. And some of that is going to be short term. Because of the markets we're in you have to be nimble, you have to react to the world around you.

You can't just ignore it. So as I look at the strategic opportunities the whole purpose of going through the work that we've done over the past four months is to look at the world of opportunities that we have and then prioritize those and invest appropriately. And I think if you try to do it all you will fail.

If you really focus on one or two things, and you can do that in a variety of different ways, but if you really focus your energies and put the weight of the organization behind one or two things that are really important you can be very successful at that. So we're working through that right now and figuring out which exactly of those things we're going to do.

All right. Most of my other questions have been answered. Thank you so much.

Adam Josephson, KeyBanc.

Thanks Dave and Monica. Dave, just one more on the economic stuff and then I have a couple of cash flow balance sheet questions.

Just one on the economic weakness you've experienced. Have you been able to square what you've been seeing with the recent pickup in the PMI and the ISM, PMI data over the past two or three months?

Yes, I'll tell you that's the one that's the most confusing to me because no, I don't. But I think the way I'd look at it in my view is it's because of our exposure in certain commodity markets I don't think that's fully captured at times in the PMI.

So I think if the PMI people spoke a lot to John Deere and AGCO the PMI wouldn't be as high. So I think that's part of it, but that's what very challenging about seeing some of this coming as you feel like that data is showing inventories going down and other things. So it's not a good answer but I will be honest with you when I don't know and I'm pretty much there.

No, I appreciate your honesty day. Just a couple on cash flow balance sheet items. So you guided to CapEx of 15 to 18.

That's obviously down from your previous guidance just presumably on account of the volume and sales weakness you experienced. What do you think -- so you are guiding to D&A of 35 to 37, I'm assuming there's a few million of Scepter amortization in there, but there's still a huge gap between your CapEx this year and your D&A. How do you expect those two to converge over time?

Yes, so I think I have a different way of thinking about -- I understand the math that you all do and the rationale, it's very reasonable. But I think about capital spending very differently than perhaps that method. There are two buckets of capital.

So there's you have your existing physical plant that you have to take care of. We're going to continue to do that. So if our factories, our offices, our equipment, we're going to maintain them to the standards that we need to maintain them to produce the product properly.

So if the roof is leaking we are going to fix the roof, things like that. So that capital spending profile isn't going to change. I think we have very good factories, we have very good equipment and we're going to continue to maintain it as such.

Where I think differently is on the growth side. And I don't want people to look at my view of capital spending and think that that's going to stymie growth because it's not.

I challenge people on where we spend our capital, and it's back to the comment I made to Brian before, it's first of all it's focus. We're going to make sure we're investing in the best opportunities that we have and not ones that we're not sure about. That's first and foremost.

Secondly, we're going to make sure we're doing, within the value chain that we're doing the operations that add the most value and that we have the most expertise in. And if we don't have that we're going to find somebody else to do it for us. And that often reduces what you need.

And then thirdly, when I think about a growth project my methodology for how I'm going to get there is much more option focused. So I'm not all in when I start looking at a growth opportunity. I want to do all the marketing work first which we've learned how to do now and then I want to experiment.

And if that means getting the product out into the market at a more expensive cost point to start to prove the case, we're going to do that and then you spend the capital to get it to the right price point if you're successful. We haven't operated that way in the past. And so it is a different mindset and we've already seen that as -- it's amazing when you teach people a few things about what's really important, how they are willing to challenge the status quo of seeing that, I'll give you a quick example, we had, I won't say which business, but we had a process in one of our businesses where we had to do massive changeovers at least once a month.

And it was one of those simple why questions, why do we do that? Well, because this, that and the other thing. And when it comes down to the end of it it's because we've always done it that way.

When you say well why don't you try it this way and see what you learn and they went and they found that, wow, somebody else can do some of this. And so we don't have to do that change over anymore and it's a markedly different view of how you need to use your capital at that point. So that's a totally different way of thinking about the business.

So I don't have a specific answer for you yet. But this has not been an environment where I've said everybody you don't get any capital. It's been an environment where I've explained and taught people how to think differently about their businesses and the inputs are lower in terms of what people are asking for.

So if you look at the second half, traditionally we've spent a lot coming out of our strategic planning cycle on growth capital projects. I don't see us seeing that. I don't see us needing to do that as much as we have had to do in the past.

Fair enough. Thanks for that response, Dave. And just a couple of others. Free cash flow for the year, what is your expectation now?

I think it's going to be a little lower than what we'd expected before. And part of that is that I'm still getting -- we want to get our working capital to a normalized rate, a steady state, so we can improve off of that and I think that's probably the biggest impact that we'll see. So I would say given the market conditions and so forth we will probably be a little lower than last year, but a big chunk of that is one-year readjustment to it.

Got it. And just two others, one on your leverage. Your leverage was 3.1 times at the end of the quarter.

I think you've said or your predecessors have previously said you're more comfortable in the 2% to 2.5% range if I'm not mistaken. Can you just tell us just how you're thinking about the current leverage ratio, where you want it to go and how close you might be to any covenants?

Yes, it Kevin, do you want to -- do you want to talk covenants here real quick just get that question off the table and then R talk about the future.

The covenant threshold is 3.25 is the maximum. So the actual covenant calculation comes to 2.9. This calculation is more of just a balance sheet calculation, but the actual covenant calculation comes to 2.9.

Compared to the 3.25, Kevin?

Compared to the 3.1.

But the 3.25 is the (multiple speakers)

Right. And the comparable leverage right now is 2.9.

Right.

Right.

That's right.

On that calculation it would be 2.9.

Right, okay. And Dave, in terms of where you're more comfortable longer term?

Right. So it's one of our priorities is to pay down some of this debt, so we're working on that. And it's -- I'm not uncomfortable where we are but we want to pay down some of the debt.

And just last one, and thanks Dave and Kevin, just one last one on the working capital. Can you just go into a little more detail, Dave, about the issue with the payables and having cut too deep previously and experiencing the consequences of that now? Just a little more on what you've experienced of late and why you think that happened?

I think it's process related, Adam, and we're putting the processes in place to be sustainable over the longer term. So I'm a big -- you've got to put the process in place because that helps you sustain and then you have a platform and you can look at that and say this is what we can do and now I can improve off that because I can look at the process again and say where can I be better, where is my worst situation.

So if the process isn't good it's really hard to tell where the problem is. I'm a big value stream map person. In fact, we've done a lot of, I haven't mentioned anything about lean activities, we have done a lot of lean-type stuff and value stream mapping is really a key element to that.

And so that's the key here. So we started, that's allowed us now to look at where is the big impact we can have renegotiating terms and how do we go about doing that and so on and so forth.

So that's what we're focused on doing here and that I thought we'd gotten through a bit of that in the first quarter. It wasn't quite what I thought. So I think we put, and in some cases you start for convenience and this is another process thing is maybe we paid a few people early now and that's not what we want to do either.

So I think there will be a little bit of a correction to that as we go through the year and then we will have a good stable base coming out of the year and we won't see a large cash outflow in the first quarter anymore, or as much. There's a bit of seasonality to this business. I can't avoid that but --

Sure. No, Dave, I appreciate it and I appreciate your candor and best of luck. Thank you.

Thanks, Adam.

Ladies and gentlemen, we've reached the end of the question-and-answer session. I'd like to turn the call back to Monica Vinay for closing remarks. Please go ahead, ma'am.

Thank you. Thank you for your interest in Myers Industries and your time and participation today.

As a reminder a transcript of this call will be available on our website within approximately 24 hours. A replay will immediately be available via webcast or call. Details can be found on the Myers Industries website under the investor relations tab.

Thank you. Have a great day.