Myers Industries Inc (MYE) 2017 Q1 法說會逐字稿

Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Myers Industries First Quarter 2017 Earnings Conference Call. (Operator Instructions) Thank you. Monica Vinay, VP of Investor Relations and Treasurer, you may begin your conference call.

Thank you. Good morning. Welcome to Myers Industries' First Quarter 2017 Earnings Call. Joining me today are Dave Banyard, President and Chief Executive Officer; Matteo Anversa, Executive Vice President, Chief Financial Officer and Corporate Secretary; and Kevin Brackman, Chief Accounting Officer.

Earlier this morning, we issued a press release outlining the financial results for the first quarter of 2017. 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.

Before I turn the call over 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'm now pleased to turn the call over to Dave Banyard.

Thanks, Monica, and thank you, everyone, for joining us today. Let's start on Slide 3 with an overview of our first quarter performance. We had a solid operating quarter, in line with the earnings that we expected. We really generated strong cash flow in the first quarter. And Matteo is going to go into some detail on that, but I want to highlight that because it indicates the strategy that we're executing and the focus that we're putting on that. We also had a great quarter executing on our niche market strategy. As you can see here, some nice growth in a couple of our key end markets with some share gains in the automotive segment, great growth in Scepter and then a solid growth in our RV business. And really this is the results of the cross-functional teams that we have focused on these niches and the execution that they're delivering for us.

We also made some solid progress on our operational realignment, and we're on track to deliver the savings that we've outlined in our last earnings call. Also want to highlight again, though, that it's not just about savings here, but it's also -- we're fundamentally changing how we operate the business here, and we made great progress on that in the quarter.

Now revenue was down for 2 main reasons. As expected, the agriculture market continues to be difficult for us, and we did have a tough comp in the first quarter from last year. So that was continued -- we saw a continued decline in that market, but that was as expected. We did see some weakness in the auto aftermarket, slightly worse than expected. However, it was in line with a lot of the indicators that we look at in the market and other participants in the market that we take a look at there. And some of that, of course, was also because of continued softness in the equipment and the retread products that we sell through that market. In addition, we managed through some raw material cost increases, and we're going to continue to manage through that with price. And Matteo will go into some detail on that. So we're executing well on our strategic initiatives that we outlined last quarter.

Now I'll turn it over to Matteo to go through the specifics of the quarter.

Thanks, Dave, and good morning, everyone. If we turn to Slide 4 of the presentation, I will walk you through an overview of our first quarter 2017 performance on a GAAP basis. And as always, all the numbers in the presentation reflect continuing operations.

Starting from the left, net sales declined 6.3% to $141.7 million compared to $151.2 million in the first quarter 2016. Excluding the impact of foreign exchange, the decrease in sales year-over-year was 7.2%. The decline was primarily due to the continued weakness in our Material Handling segment, agricultural end market and, as Dave mentioned, softer-than-expected demand in the auto aftermarket in our Distribution segment. Gross profit margin declined 230 basis points year-over-year due to lower sales volume, higher raw material costs and higher onetime costs. In the first quarter, we recorded a onetime restructuring cost of approximately $1 million, mostly due to cost incurred for the strategic realignment in our Material Handling segment that we announced in the last earnings call. GAAP diluted earnings per share was $0.10 compared to a loss of $0.11 in 2016 in the first quarter. GAAP diluted earnings per share in '16 was negatively impacted, as you may recall, by $8.5 million of impairment charges in Brazil and approximately $2 million of severance-related costs.

Now if we turn to Slide 5, I will provide you an overview of the key variances on an adjusted basis. Adjusted gross profit margin was 30.4% in Q1 compared to 31.9% in the last year, a decline of 150 basis points. The reduction in gross margin compared to last year was due mostly to lower sales volume, some operational inefficiencies primarily related to the decrease in sales volume and higher raw material costs, which, as Dave mentioned, we expect to begin to recover with price increases starting in the second quarter. Adjusted SG&A was $35 million compared to $36.5 million of last year. The year-over-year decline of $1.5 million was primarily the result of lower compensation cost, thanks to the headcount reductions that we executed throughout 2016. As a result, adjusted operating income declined by $3.6 million or 31%. Most of the decline year-over-year was driven by the reduction in sales, the higher raw material costs and the manufacturing inefficiencies, and these effects were partially offset by cost reductions. Adjusted diluted earnings per share was $0.13 compared to $0.21 in 2016.

If we turn to Slide 6. Slide 6 provides some details on the performance by the 2 segments. If we start with Material Handling on the left side of the page, Material Handling sales declined by 5.4%. The reduction in sales was driven primarily by the anticipated decline in the agricultural end market, which continues to experience some softness. However, the decline in agricultural sales was partially offset by increases in automotive, Brazil food and beverage and Scepter. Adjusted operating income in the segment decreased by $3.2 million. The reduction was primarily the result of lower sales volume, higher raw material costs, which, as I mentioned before, we expect to offset with price increases going forward and some manufacturing efficiencies offset partially by SG&A savings.

Moving to the right side of the page on Distribution. Sales declined by 8.6%. The year-over-year decline was primarily due to lower equipment and retread sales as well as softer-than-expected demand in the auto aftermarket. However, the team did a nice job in driving positive mix of supplies versus equipment during the quarter, which benefited our operating margin. Adjusted operating income in the segment declined by $1 million. The reduction was primarily the result of lower sales, partially offset by the positive mix that I mentioned before.

If we turn to Slide 7, I will give you an overview of our balance sheet and cash performance for the quarter. We are very pleased with the cash performance in the first quarter. As you can see from the left side of the page, we reduced our debt at the end of first quarter by $10 million compared to the end of December of last year. As a result, our leverage ratio remains stable at 2.9 despite of the lower EBITDA. We were able to reduce debt by taking actions to further stabilize our working capital and grow our cash flow. Specifically, we decreased our accounts receivable past due balances by $7 million between December '16 and March '17 and we increased our inventory turnover at the end of the quarter to 7.7x.

As you can see from the chart at the bottom left side of the page, working capital as a percent of sales in Q1 was 7.8%, which is in line and consistent with our performance at the end of the quarter of '16 and below our target of 9%. Additionally, lower capital spending of $7 million, partially due to timing, also contributed to the increase in cash flow. As a result, we generated very strong free cash flow of $12.6 million compared to a use of cash of $18.5 million in the first quarter of 2016. Our solid free cash flow performance in Q1 '17 drove our trailing 12 months of free cash flow up to $52 million, corresponding to 9.5% of sales. Now while this is probably a bit high due to the onetime benefits from the past due collections, it demonstrates what we can achieve by focusing on this key metric. So we're really pleased with the job that the team did on cash.

And with that, I'm going to turn the call back to Dave to discuss our outlook for '17 and provide a strategic update.

Great. Thanks, Matteo. I'm on Slide 8. Starting at the top, we're holding our prior outlook, which is portfolio revenue to be flat. And obviously, given our revenue performance in the first quarter, that's going to require growth in the back part of the year. And really, what I want to highlight here is that in the first quarter, all of our businesses, with the exception of the ag business and the auto aftermarket, grew. So we're off to a good start there, and you can see why in the middle of the bullets here because of our strategic orientation towards niche markets. And we're investing in new product development. We're going after adjacent markets for share gains. We're putting in the real tools that are needed, the blocking and tackling in our auto aftermarket business to really accelerate our commercial execution. So we're taking the steps needed strategically to improve our ability to gain share. And we're also seeing some market lift that we'll talk about here in a second.

As I've highlighted earlier, our operational realignment is on track. We've started moving equipment. We are finalizing our outsourcing initiatives. And really, we're making the progress exactly as we thought we would do in the first quarter. And lastly, we're using our cash to pay down debt and fund a lot of the strategic initiatives. Over on the right, you have our 5 strategic end markets, and I want to talk a little bit about the conditions in each of those and how we're taking advantage. In some cases, as I said, we are working to take share; and in other cases, we're riding favorable market dynamics.

I'll start at the top. The consumer and vehicle markets, as a combination, we're seeing some strong market indicators there, particularly in the vehicle side of things, both with automotive product launches as well as in the RV and marine segments. However, we're also taking share there. I mean, we had 40% growth in our automotive business this past quarter and that was from winning some new business as well as from some market growth there.

In the food and beverage, it continues to be a challenge, particularly in ag, where we're seeing some improvement in our Brazil operations on the beverage side. What I'll say about the ag market is that we're starting to see the indicators that, that market has bottomed out. We did have a very strong first quarter last year and then things really dropped off significantly in the second part of the year. We don't see that happening this year. It's been more of a steady pace of business. And as the M&A works itself through the system in those customers as well as the year progresses with farm income, we expect 2018 to be a better year. So we still expect that market to be down this year because it is a -- the farm incomes were down significantly again last year, but we see that, that market is now starting to stabilize.

On the industrial side, the market's doing well, and we saw very good indicators of that within our businesses in the first quarter. And in the auto aftermarket, as I highlighted, the market was soft in the first quarter. We are expecting to grow share there as a way of growing, so it's going to be really on execution as we see how that market continues to build throughout the year.

So overall, in summary, we're very pleased with the performance, particularly with cash flow and earnings in the quarter, and we expect to have flat sales throughout the year, which we expect to be some continued improvement as we go.

And with that, I'll turn it back over for any questions.

(Operator Instructions) Your first question comes from Chris Manuel from Wells Fargo Securities.

Just a couple questions for you. If I could start with, I think you mentioned CapEx would pick up a little bit, but I think you spent about $0.5 million in the quarter. That's probably barely keeping the roofs patched and that kind of stuff. But what type of projects do you have kind of slated up that you want to do? How are you feeling about new product launches, things of that nature, things you're going to need to spend capital on?

Chris, it's Matteo. The way we think about it is, obviously, CapEx spend will be a little choppy this year. You will see that we'll start to increase some cap expenditures starting also in the second quarter. And we are reconfirming the same numbers that we gave you in the March call, so we are expecting to spend between $10 million and $12 million of CapEx throughout the year. And to answer your second part of the question, I would say that a good chunk of this amount is really around growth. So you will see this coming in the upcoming quarters.

Okay, that's helpful. As you look through some of the segments, just remind me, I think we still have one more quarter of ag that's -- when we start to saw the downturn last year in the seed box business, is that accurate? And then you should begin to anniversary that? Or does that -- when does that occur? And if you can remind us again, that's been a -- I want to say that it's kind of mid to upper single-digit EBIT hit per quarter, does that feel right?

Yes, I think you said it correctly, Chris. I would say that the second quarter is going to be the last one where we have a tough comp on ag. We are confirming the same -- as Dave said, same outlook for revenue for the year. So you will see first half, which is going to be slightly down, and then the pickup coming in the second half.

And the other thing I'd say, Chris, as we've talked to these customers, there is a bit of a thought process last year that they were returning to a more normal pattern. And once those boxes were delivered, I think the customer realized that there was a bit of over-optimism there in the year. And they definitely did not have that same level of optimism for this year, which I think is prudent. And couple that with the fact that there's some very large combinations happening in our customer base, and that was a big distraction for a lot of them in the second half of last year. Now not all of that is done, but we all know that when you have 2 very large organizations combining, and we have that happening in a couple of the customers, not just 1, that sort of artificial controls are slapped in place that change the game in the short term. So fundamentally, we still have very good position in this market, and we feel that the customers now have a bit more of a handle on the operating environment that they're in. And so we're seeing what I'd say is normalized demand, which we haven't seen in a while. And so that's a good place to start planning from. So we're optimistic from that standpoint. However, all that being said, there's not a lot of fundamental strength in the ag market this year, but there's indicators that are saying there are things coming back as we extend out here through the year.

Well, maybe it would be helpful, I know a lot of the weakness was geared specifically to the seed box piece or there was some change in adjustments and the way they wanted to handle fleet and things of that nature. If we were to try to isolate that aside, how is the rest of the food and bev business, the big boxes for paste and other things? Have those exhibited similar characteristics? Or are those still kind of flattish or seeing modest improvement? I mean, is it really isolated in one piece? Or is it really wholesale across that segment?

Well, so the answer to your question is it depends, and that's -- it depends on the specific niche market that you're talking about. So the tomato crop, as an example, which is where we play the largest, also had a fairly large bumper crop over the past few years. And that increased levels of inventory and decreased the need for more packaging. So kind of a perfect storm there. And I think those -- we're not only trying to improve our position within that market, but we're also looking at alternative segments that would use our packaging. And that -- we've made a lot of progress on that. So we're not sitting around waiting for the market to come back in ag or food. We're looking for opportunities for growth outside of market growth. But I think a lot of these things will come together around the same time. On the beverage side, we are seeing a rebound in our Brazil business, which is somewhat counter to what the customers are seeing. But part of that's a shift from can to bottle, and that's helping us. And we're seeing robust demand there, and that's helping our Brazil operation.

Okay. One last question, and I'll turn it over. But Matteo, you've targeted, I think earlier in the slide, 9% as a portion of sales as working capital. Looks like you were a little 1% or so -- a little over 1% below that. Is that something that you might need to replenish a little more back into working capital to get the levels you want? Or are you comfortable here that sub-8% is something you can live with?

Sure. Chris, what I would say is I would stress what I mentioned in the prior remarks. We had about $7 million of past due collections happening in the quarter. We're very pleased with the work that the team did, but we also have to recognize that this is not something that we can repeat. We don't have enough past due to collect. So I think when you think about the working capital percent, I think this clearly impacted the percentage. So I would not change the overall long-term target compared to what we gave you back in the March call.

I'll say something, too, about this, Chris, if you don't mind. I think what it highlights, first of all -- I'll put it to you this way: if we are consistently better than our target, we'll improve on it and we'll change our targets. So we're not going to set a low bar on everything. However, if you remember from our last call, this target was set to make sure we're not stretching ourselves in too many different directions and driving the wrong behavior. We want to make sure that people are focused on the critical and most difficult things that we really want to improve. I think we are making some tremendous progress on working capital, and you're seeing that in our numbers. And that's a testament to the focus and the operating efficiencies that we're driving out in the field. Over time, if we're continuing to operate at this more improved level, we'll set that as a new goal. That's the culture we have here. But I think we're pleased with the results, but there may be situations, particularly if you think about as well we're doing some restructuring here, we probably need to invest in some inventory to make sure that there's no customer impact and machinery moves and sort of things like that. So there's going to be some choppiness. But we're going to try to keep it under the goal.

Your next question comes from Adam Josephson from KeyBanc.

Dave, you mentioned the industrial market is doing well. You saw some good indicators of that in the first quarter. Can you just elaborate on that? And have you seen a notable improvement there? I know you boosted your outlook for industrial for the year, and I'm trying to understand precisely what has changed.

Sure. Well, I think one of the big -- there are a couple of indicators here. Commodity prices are coming up, and they're sticking, so -- in some cases, resin did not, but some of the other commodities, seal and rubber and so forth. Inventories, which were peaking a year ago are -- have been coming down steadily. Those are things that I look at for what I'd say short-term indicators. We're also seeing our ability to go out and get price, and that helps. And so those are confidence. I don't think -- this doesn't feel like some massive V-shaped recovery here, but the industrial markets have clearly been in a slow period for the past 18 months to 2 years, and there's signs of life here. Now the next trick in my book is to look for CapEx. And when we start seeing more CapEx out there in the industrial world, that's when I think there'll be a full-on recovery because that sort of lags, if you will, the "get by with what you have" mindset. And so looking for the larger industrial players to start spending bigger chunks of money on CapEx, which I think they will at some point. So but that's how I look at it. So I'd say there are short-term favorable indicators. I'd say the counter-indicator is interest rates. That goes against -- that could potentially slow things down. But I think money is still pretty cheap, so I'm optimistic.

And just to be clear there, have you seen any signs of increasing CapEx on the part of your customers as yet?

Well, we're seeing it in as much -- if you look at some of the markets we're in, vehicle and in auto, despite the fact that you're seeing kind of consumer behavior around auto slowdown, there's still a lot of investment in new model launches, and that helps us. And that requires CapEx. Certainly, within our industrial distribution businesses, we've seen good life over the past 4, 5 months. And that generally comes from companies investing in their factory and equipment. So that's where we're seeing it. We don't sell capital equipment, so it's not -- with the exception of our auto aftermarket, which has not been good. But in the industrial space, I'd rely on our channel, and the channels seem to be doing pretty well at the moment.

And just one last related question to that. You talked about commodity prices going up, and you indicated resin starting to roll over. Copper, iron ore, oil, all these commodities have rolled over in recent weeks. Does that -- is that a sign to you of anything or not necessarily?

I think you've got to let things play out longer than a shorter period of time. It's kind of -- I look at -- to me, price in the market is helpful, how sticky is the price that you put out there, are people willing to accept it based on what they're seeing as well helps. But there's -- it's a weird environment. You saw consumer spending did pretty well last year, and that's, I'd say, tapered off, if you will. And that's part of why we're seeing some weakness in our auto aftermarket. And so you kind of have these back and forths with industrial and consumer, both of which are the lifeblood of our economy. So I can't give you an exact number. This is not some 2010, 2011 rocket ship ride here, but it's -- I think it's better.

Right. On the auto aftermarket situation, why are people not replacing their tires as frequently? I just -- in an improving economy or at least a supposedly improving economy, you would think that, that wouldn't be a problem.

I agree. And to be honest with you, it's a little bit of a mystery. Part of it long -- I mean, the long-term fundamentals are tires are better, I will say that. So through this cycle, there's probably a little bit more of a lag than we've seen in the past. There are more new cars on the road, so you probably don't need to change your tires for the first couple of years. And so there's a bit of that. There are a lot of short-term things that we could debate, weather, et cetera. The weather does impact things in a short period of time. I would look at some point for a rebound on that because it's -- but -- so the short answer is there's some -- I think consumers are prioritizing their spending elsewhere. Tires have become, I think, a bit more, over the past 5 years, more of a fixes fail rather than a -- someone at your tire store convincing you to do it preemptively. So that -- all those things combined are making it a little bit difficult. But I think the fundamentals that would drive it are still strong. Miles driven are there, gas prices have come up but not to the point where it would convince somebody to stop driving. So it's still a mixed bag. I don't have a specific answer to it, but it's -- we're certainly keeping our eyes closely on it. The indicators that we monitor and the peers that we look at all have the same challenge in the first quarter, and so.

Right. No, I appreciate that. Just one more on the sales side, Dave. Your outlook for consumer and vehicle is up low single digits. How much of that is market growth versus share gains?

It's a little bit of both. So we did some really nice work that you saw in the first quarter -- the results of what you saw in the first quarter at gaining share in our consumer businesses and the vehicle as a combination. I mean, the vehicle market, particularly the recreational vehicles, if you include marine in that, boats and so forth, are really strong. And I think that's partly maybe where some of the tire money is going, but it's also a function of like the age of the population. There's people retiring and then buying RVs. The RV association has done a wonderful job of promoting that business. So those markets are strong, but we also feel with our niche market focus and these teams that we have organized that we're in a position to grab share where we can.

And just one on the margin side, just longer term. Obviously, you rolled out your strategy a couple months ago. Can you just remind me, you're obviously adjusting to a lower sales environment, and your CapEx reflects that and you've obviously got the restructuring you're doing this year. Can you just refresh our memory as to precisely what it is you're doing to adjust to this new sales environment and specifically how that affects the capital that you're spending?

Sure. I think the -- let's bifurcate things here. I don't -- we would not do this any differently if we were growing fast or if we had a retraction like we've had for the past several quarters. So the strategy is one that works both in a growth environment -- and in fact, it's designed to foster more of the growth environment, to be honest with you. And really what it's doing is it's reducing the complexity. And when you reduce complexity on the scale that we're doing, you can take out a huge amount of cost. Complexity always has a tremendous amount of cost both on the capital side as well as on the people side. So that's what we're doing. And so when you think about why we can spend less capital -- and I think the first quarter is not a normal view of that. As Matteo highlighted, there's going to be some choppiness to our capital spend because some of the pieces are big chunks, and they come and go. But when you can manufacture with less complexity, you don't need as much capital. And so when you don't need as much capital, you're not going to spend at the same levels that you have in the past. And we have a lot of new machinery, that helps. But we're also looking at how we use our machinery differently and using partners and letting them be the capital investment and letting them handle some of the complexity. And they'll charge us for that. But we feel that, that arbitrage is in our favor at this point; and generally, it is. And so we can focus on what we really do well and what nobody else can do well. And we let people who are great at higher volume or other types of things do that well. And that you sort of naturally allow people -- the efficiency equilibrium is where everybody's doing what they do really well, and you make the most money when you do it that way.

And just one clarification. Can you just give me one example of reducing the complexity, just so we can just put a little meat on the bone?

Sure. We have 2 factories that have -- that are full to the gills with machinery and we make a broad array of different products that requires a tremendous level of, what I call indirect support to maintain. So you need to maintain the equipment. You need to do changeovers. You need to maintain molds and so on and so forth. We don't necessarily make money on everything that we are doing in each of those situations. And so when you focus on the niche and focus on where you're really good and where you're driving the most economic value in your business, you're going to find pieces that don't fit that. And you either get rid of them or, in the case of what we're doing, you find someone that can do them better. And that's -- so you take a whole product line and you give it to a supplier and say, manufacture this for us. And I realize you have to make a margin, but the amount of people that were assigned to running that product line internally is -- ends up being much higher than the number of people that the supplier needs to do it because they just -- they operate differently. And so rather than try to operate differently internally, we are finding people that operate differently already and let them do that piece of work for us. So there are going to be product lines that are manufactured by someone else. They have our design, our features and benefits. We still like the product line. It serves customers either as an ancillary product or the main product, and we focus on the things that are unique to us that we do well.

Your next question comes from Chris McGinnis from Sidoti & Company.

Can you just maybe quickly -- you talked about investment in new product development. Can you just maybe talk a little bit about how long that takes to come to market and maybe what you're working on?

Sure. Good question, Chris. The answer is it depends. Each of our niche areas is different. Some of them are -- have a time associated with the market. So in other words, some of our businesses require a product to be launched at a certain period because of the buying cycle of the customer. For example, in our consumer business, in the gas can business, there's a load-in that's going on right now for the spring season. And it's well underway, I should say. If you haven't launched a product by the fall, you're not going to make that as opposed to -- and agriculture has a similar type of dynamics. So there's some seasonality where you have to hit a particular season to get it there. In other businesses, we're going to be -- and in some of those cases, you're making brand new products; in some cases you're making, I'd say, tweaks or improvements -- improved performance or highlighting a particular product parameter that the customer has highlighted for you that they'd like to see improvement on. So in those cases, it's going to be a quicker cycle. In a brand-new category, it's going to be a longer cycle. So there's a wide variety of different things we're focused on. And I will say, we're also focused on using the existing products that we have to penetrate further in different markets. And so that's -- they both go hand in hand, if you will. It sometimes feels like a new product launch when you're taking an existing product into a new segment, but it's really the product's already there, so it's a lot quicker time to market, if you will.

Okay. And then secondly, just can you maybe just talk a little bit on the sourcing because it's seemingly such a big initiative? How comfortable do you feel with -- how strong? You talked about it last quarter when you just did -- maybe how far along you are with completing, I guess, most of the sourcing initiatives?

Sure. It's the first thing that had to happen in the order of things. We had to be comfortable that we had a supply base that could handle the work that we're talking about. So that's -- it's well underway, and we're producing at suppliers today.

(Operator Instructions) Your next question comes from Chris Manuel from Wells Fargo Bank Securities.

I wanted to come back to the Distribution piece for a second. I mean, I know you said you anticipated this to be a lift over the balance of the year, but you've been running down a bit thus far. Can you talk a little bit about where you are in the process of retraining, rehiring, making adjustments through the sales force, through the system? And are there some specific end niches or pieces that you think you're going to turn this, I guess, presumably markedly positive over the next couple of quarters? Is this something where we might begin to see some traction on in 2Q? Or is this something that's a 3Q, 4Q event? I mean, just kind of give us a sense of the short-term trajectory here.

Yes. I think I would -- given the market dynamics, I would talk second half on this business for an improvement, if you will, on the top line. Where we are in the cycle is we have done a great job of recruiting. So we're past the heavy lifting on that. There's still always -- I think this is the kind of business where you're always going to have some churn, and so we are going to be in constant state of working on improving our talent within the organization. That never stops in the cycle of things. But the big heavy lifting on that -- to put some perspective on this, we've had more than 1/3 of the sales reps in the organization turn over in the past 18 months. And almost half of the sales leadership turned over as well. So it's been -- and a lot of that is by performance. So it's a -- that's a hard exercise to go through, and we've gotten through the heavy part of that. We are deep into the tool upgrades and the training portion. We have just spent a tremendous amount of time with the field team as well as the leadership team over the past several months in terms of training, and we are continuing to roll out improvements in the tools that we provide to our sales force. And our methodology is to test the tool in a couple of key sales regions, make sure it works, make sure we understand what the kinks are and work those out before we roll it out broadly. And then once we have it, to really hit it hard and roll it out broadly across the organization. And that's in process. And these are technology upgrades. I mean, this is a business that has been underinvested in. So you want to talk about capital investment, there's some that goes with this. It's very small in the big scheme of things, but we have underinvested in this business from a tools and training capability standpoint. And we're rectifying that now. Unfortunately, that just takes some time. You see it in the performance of the new reps. There's -- they're hungry for information. They're hungry for tools. They're excited to get out and go sell. I've interacted with a number of them recently through our training process, and they're excited about what we're doing. But it still just takes time. I mean, we sell 20,000 SKUs. It's hard to get a handle on that. So we're boiling it down into smaller chunks for the new folks. And what's amazing, when you do it and you really go after it in this fashion, the top performers learn some things, too. When I interact with them, because they're also doing a lot of the training, those leaders and top-performing sales reps also highlight to me that even though they're leading the charge, these tools are helping them as well. And so we're gaining share with them as well.

That's helpful. Last question I had was kind of around liquidity, some thinking here. If I look at -- you get about $180 million of debt. It looks like you shrunk your line to about $200 million. If I kind of think of that $20 million of liquidity you have there, from earlier comments, it sounded like if we reinvest it back into some working capital, there was a onetime $7 million pass-through there that had artificially lowered that. But also dovetailing that with your comments that you may need to invest a little bit in inventory while you're doing some moves, it looks like -- at least my math suggests half or more of that could end up – of that $20 million availability could end up being eaten up. And then CapEx is going to pick up a little bit in the near term, too. Granted I'm not giving you a lot of credit for what you're going to generate in Q4 with cash in the near term, but it would seem as though we're not leaving a lot of room to maneuver if we have a 1 quarter or 2 quarter blip or something happened with end markets. Can you kind of walk through what the thought process there was? Is this something that you decided to do? Was there something that's dictated to you? Or be even the notion that, look, it would seem to curtail your ability to execute M&A in the short run, you'd have to sell before you would buy or something along those lines, and I know that's been a piece of your long-term strategy is to grow the business inorganically as well.

Right. So couple of questions in there. Let me break it apart here first, Chris. The first -- let me correct something here, the $200 million is the revolver, so we still have $100 million in private placement debt. So it's not $20 million. It's $120 million that's available. So let's make sure you understand that correctly.

I forgot that piece. That to me feels a lot better.

Yes, okay. So we do have covenants, of course, that require certain restrictions to be met on that. But I mean, I will say this, our balance sheet does have some constraints. And so that's why you see this focus that we have from a capital allocation standpoint of making sure that we are driving cash flow, paying down debt and so forth. So that's part as why that's a focus. It's always going to be a focus for us, frankly, as we move forward because of our long-term strategy. But it's more prescient at the moment given some of the constraints we have. In terms of M&A, M&A is a process, and we're just getting out there in the market and introducing people to our strategy and what we might be interested in, getting in the deal flow, building a funnel. But even within that, it's very -- it can be very random. I mean, certain things come to market, and you can't control the timing of that. The owner of the business controls the timing of that. So we are certainly in a position where we feel we could be ready, but we're also in a position where we're cultivating for the long term a variety of different strategies in M&A. And that just -- that takes time no matter what you're doing. So you have to be ready to go at a moment's notice because, as I said, things come on the market. And we will be ready for that if something that we really like and we've been looking at comes on the market. But we're also looking at this -- this is a long-term strategy. And I'm certainly not going to be pressured by anybody that you have to do a deal here or don't do. That's not the way I think. We're going to do the best possible deals for Myers Industries and our shareholders, and we'll do them on our own time line as best we can. Did you have a follow-up, Chris? Or does that answer your...

That's all I needed.

Your next question comes from Adam Josephson from KeyBanc.

I'll make it quick, guys. The debt covenants, is it 3.25%? Is that right, Matteo?

It's 3.75% for the first half then it goes down to 3.50% in the third quarter and 3.25% in the fourth.

Okay. On resin, I know higher resin hit your profit in the quarter. You're implementing price increases to recover that. Now we have ethylene and propylene prices going down. So presumably you're expecting resin prices to go down from here, and if so, how would that affect the effectiveness of these price increases that you're implementing, if at all?

Good question, Adam. I think -- so a portion of our business is actually indexed. So it will follow the commodity fluctuations. We passed a few price increases in April. And so far, everything is going well. But as you said, I confirm your view that we are seeing -- we are forecasting actually the resins to go back down in the back end of the year. So at the end of the day, this $1 million impact that we had on the raw material will correct itself by the end of the year.

And just one question on the second quarter. Based on your commentary about the ag market, I would assume you expect your profit to be down in the second quarter from a year ago? Is that a reasonable assumption?

We don't really give specific guidance on -- to that level [of detail, Adam].

There are no further questions at this time. I turn the call back over to presenters.

Thank you. We thank all of 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. Thanks, and have a great day.

This concludes today's conference call. You may now disconnect.