Myers Industries Inc (MYE) 2017 Q3 法說會逐字稿

Good morning. My name is Jodie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Myers Industries Third Quarter 2017 Earnings Conference Call. (Operator Instructions)

Thank you.

Monica Vinay, you may begin your conference.

Thanks, Jodie.

Good morning. Thank you for joining us today. I'm Monica Vinay, the Vice President of Investor Relations and Treasurer at Myers Industries. 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 news release outlining the financial results for the third quarter of 2017. If you have not yet received a copy of the release, you can access it on our website at www.myersindustries.com. It's under the Investor Relations tab.

This call is also being webcast on our website and will be archived there along with the transcript of the call after this event.

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 good morning, everyone. Thank you for joining us. We're going to start on Slide 3 with an overview of our third quarter 2017 results.

We're very pleased with our performance in the quarter. We generated $9.7 million in free cash flow, and our operating improvements are really yielding this cash flow from continued working capital and capital spending discipline.

Our niche market strategy is delivering results. We had double-digit year-over-year growth in our consumer and food and beverage markets. Just a little bit color on that. While some of that consumer increase is due to some of the storm events that we saw in the quarter, there's also a big chunk of that, that came from strong growth in our food processing business as well as our ag business. So we're very pleased about that.

We continue to see positive momentum in our vehicle market, driven primarily by our RVs business that showed high single-digit growth in the quarter, and that business continues to execute very well and deliver for their customers in a market that's also growing very nicely.

We had positive sales mix in our lean initiatives, which are driving gross margin expansion year-over-year, up 250 basis points. And the highlight of our cash flow here is we're continuing to pay down debt. And as you can see, we're down $31.5 million year-to-date in debt paydown. And if you add the dividend, we've been paying that, we've delivered back to shareholders over $40 million of cash year-to-date.

On the challenges side, our Distribution Segment continues to have some challenges, although it was a better quarter and we're seeing some momentum gaining there. Our sales increased third quarter over the second quarter, down mid-single digit year-to-date, and I'll highlight that a big -- the majority of that decline was due to the exit of a low-margin business in our Patch Rubber business.

On the Myers Tire Supply, net sales were down a little over 1%, and I'll highlight here that if you factor in the impact that we had -- and we did have some impact in Florida and Eastern Texas from the storm events. If you factor that in, the Myers Tire Supply business was flat for the quarter.

As I mention Patch Rubber, we had a fairly large decline in revenue from exiting of a low-margin business, and I think you'll see, as we go into the profitability by segment later on, that it's delivering as we expected. We're -- our profitability continued to improve.

Our new pricing model and lean initiatives are continuing to prove -- produce positive results in this segment. So we're looking for an improving trend as we move forward into the fourth quarter here.

We also had some material cost increases in the quarter, primarily driven by the storm event -- that same storm events. We feel that that's a transitory impact to us. We were able to mitigate a lot of it through price. And we see that it's not as big of an impact as we've seen in previous years in storm events, and we think the industry handled and is prepared for those things very well.

So with that overview, I'm going to now turn it over to Matteo to go through the specifics.

Thanks, Dave, and good morning, everyone.

If we turn to Slide 4, we'll walk you through an overview of our third quarter performance on a GAAP basis. And as always, all the numbers in the presentation reflect continuing operations.

As you can see, starting from the top left side of the page, net sales increased 8.6% to $144 million compared to $132.7 million of the third quarter of last year. Now if we exclude the impact of foreign exchange, the increase in sales year-over-year was 8.1%. The increase was primarily the result of higher sales in the food and beverage and consumer market, partially offset by a decline in the auto aftermarket and industrial.

Gross profit margin increased 120 basis points year-over-year due to higher sales volume, a positive sales mix and cost savings coming from our strategic realignment. Higher raw material costs were more than offset by the price gains and the positive sales mix. Additionally, restructuring expenses resulting from the strategic realignment in our Material Handling segment were $1.9 million in the quarter. At this point, we believe the strategic realignment is mostly completed and would expect -- expecting to be fully wrapped up by early 2018. As a result, the GAAP diluted earnings per share were $0.11 compared to $0.01 in the third quarter of 2016.

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 29.6% in third quarter compared to 27.1% of last year, corresponding to an increase of approximately 250 basis points. The increase compared to last year was due to the higher sales volume, the positive sales mix and restructuring real estate.

As I just mentioned, the price actions, combined with a positive sales mix, more than offset the material cost increases both during the quarter and year-to-date.

Adjusted SG&A was $35.6 million compared to $32.2 million of last year. The year-over-year increase was the result of higher incentive compensation cost, which reflect our improved outlook for the year that Dave will talk about later on in the presentation. Those costs were partially offset by cost decreases, which were, in part, the result of the cost-out actions taken last year.

As a result, adjusted operating income increased by $3.1 million or 80%, and adjusted diluted earnings per share were $0.11 compared to $0.04 in the third quarter of last year.

If we turn to Slide 6, I will walk you through the results by the 2 segments, and starting from the left side of the page with Material Handling.

Sales increased by $15.8 million or $14.2 million. The increase in sales was driven primarily by the growth in the consumer and food and beverage markets that Dave mentioned earlier. Consumer sales were higher due to the increased sales of fuel containers as the team at Scepter did an excellent job of meeting the heightened customer requirements during the hurricane season.

Pricing actions and sales growth in our Ameri-Kart business, which serves the RV and marine markets, also contributed to the increasing sales year-over-year.

Conversely, market softness, combined with our focus on 80/20 sales initiatives, which includes, as we discussed in the past, the elimination of low-margin products, resulted in a decline year-over-year in our industrial market.

Adjusted operating income in the segment increased $5.2 million to $9.9 million, which is more than double last year's adjusted operating income of $4.7 million. The increase was primarily the result of higher sales volume, positive sales mix, partially offset by net unfavorable raw material costs and higher compensation costs related to the management incentive program that I mentioned earlier.

If we turn to the -- our salary page, Distribution. Net sales declined by 6.5%. The decrease in net sales was primarily the result of the deliberate exit of a low-margin product line in our Patch Rubber business.

Net sales in Myers Tire Supply were down only 1% year-over-year. And actually, on a sequential basis, the Distribution segment net sales increased 2%.

During the quarter, the Patch Rubber business also had a large customer win in its niche highway marking tape product line, and the business will realize the benefits of this win in the next few quarters.

Adjusted operating income in this segment declined by $100,000 or 3%. The negative impact of the lower volume was mostly offset by the positive price and the favorable sales mix due to the exit of the low-margin business.

If we turn to Slide 7, I'll discuss the cash flow and the balance sheet. So as Dave mentioned at the beginning of the presentation, we generated a strong free cash flow of $9.7 million during the quarter, and we added approximately $31 million year-to-date. Thanks to this performance, we have reduced our debt by $31.5 million year-to-date and lowered our leverage ratio of 2.6 in spite of lower 4 quarters of EBITDA compared to the end of last year.

Additionally during the quarter, in spite of our Material Handling realignment project, we also successfully completed the disposition of one of our facilities. And the proceeds from the sale of the facility were approximately $6 million, which helped us to further reduce our debt.

Our continued focus on working capital contributed to the stronger cash flow. Working capital as a percent of sales in the quarter was 7.5%, which was slightly below the prior 3 quarters and nicely below our target of 9%.

We successfully increased our accounts payable as we continued to negotiate better terms with our suppliers. And we also prepurchased some raw materials where possible to ensure that we could serve our customers in the aftermath of the hurricane season.

CapEx spending in the quarter increased sequentially by $900,000 to $2.8 million and was higher than last year's CapEx by $1.9 million. Year-to-date, CapEx is about $5 million compared to $11.5 million of the first 9 months of last year. And now the focus on our strategic realignment and the 80/20 sales initiative has resulted in a lower capital expenditures during the year.

Therefore, we are lowering our CapEx estimate for the year to be now in the range between $7 million and $9 million, which was below our previous estimate of $10 million to $12 million and below last year's spend of $12.5 million. We are aware that the current spending profile is relatively low. And as a result, we are expecting CapEx to be higher in 2018.

With that, I will turn the call back to Dave to review the outlook and provide a strategic update.

Thanks, Matteo.

Let's switch to Slide 8, and I'll take a -- walk through the 2017 revised outlook and strategic update.

We're increasing our outlook to -- for our full year revenue, we now expect to be up low single digits due to continued strong demand in our food and beverage and consumer markets, and that's up from flat on our prior estimates.

If you go to the right side, I'll walk through the 5 markets that we serve and talk a little bit about some of the color in each of those markets to explain why we're taking up our forecast.

Starting at the consumer market, the -- we obviously benefited from the storm activity in the third quarter, but you'll remember that market has been very strong for us all year and we've executed very well in that. And so that -- we obviously were helped a little bit more in the third quarter by hurricane activity, but we see that business continuing to grow. And in fact, we have very strong backlog for the fourth quarter as well in that business.

In the vehicle market, this is -- we're expecting to be up high single digits, and it's driven primarily by our RV business. That market continues to be strong. And on top of that, our team there has executed very well, particularly through the third quarter here, and delivering to the customers in that market.

The food and beverage, real nice story here. We expect that to be up high single digits now. And really, 2 main drivers to that. The first one is in our food processing portion of the business. We won some new customers there, saw nice growth in the third quarter out of that and expect that to continue. We've also, after 3 years of decline, are seeing the ag market return more to a normal state here, which is resulting in a -- the -- we're really at the beginning of that season, but starting to see that growth in the third quarter, and we're seeing that momentum continue through the fourth quarter here. And we expect that to continue on into next year.

On the industrial side, we're expecting that business to be down low single digits, and that's primarily as a result of our -- as we're doing our operational realignment, we're also looking -- taking a look at all the product lines we have there and making sure that we're only focusing on the best ones that we have. And as a result of that, we've had some product line rationalization in that segment there. I think generally, the market is growing, and we're taking advantage of some of that. We have good backlog at the moment. However, we've eliminated certain product lines that are reducing the output there.

In the auto aftermarket, we're expecting that to be down mid-single digits. Again, as I said earlier, the momentum is building here. It's not where we want it to be, but we think we're doing better. But I don't think we're going to be able to overcome the gap that we built in the first half of the year. So better performance in the third quarter. We're expecting better performance in the fourth quarter as well, but not enough to overcome, as you will, the hole that we built earlier in the year.

Going back over to the left of the slide here. I'll go through the 3 portions of our strategic plan.

We're making strong progress, as I've highlighted a number of times here, with our niche market growth teams, both on the food processing and the consumer side but also in the ag market.

In our Material Handling side, we've -- our pricing tools are in place. At distribution, we're seeing very positive results from that through the third quarter, and we expect that to continue and build as we go into the fourth quarter. Operationally, as Matteo mentioned, our operational realignment is well under way, and we've completed a lot of the big heavy lifting, if you will, in the third quarter. And we expect that to be largely completed by the end of the year. A little bit -- few last things to be completed in the first part of 2018. We're well on track to achieving the $10 million of savings that we expect in 2018.

From the capital allocation side, we're very pleased with the cash flow that we're generating out of this business. And what's that doing is it's allowing us to strengthen our balance sheet and build a war chest as we look at a very robust deal pipeline. And I think we positioned ourselves well to execute on this portion of the strategy. We're looking at a lot of different things in the pipeline from an M&A standpoint. And we feel that the work we're doing, driving cash flow in this business is really positioning us well for the future.

So with that, we'll open it up to questions.

(Operator Instructions) Your first question comes from the line of Chris Manuel of Wells Fargo.

A couple questions. First, I appreciate that we're still in 2017. But it sounds, like Dave, as you went through some of your end markets, you've seen quite a nice pickup ending the year. And in particular, you noted at ag, this is kind of the beginning in the season. So if you could maybe give us some thoughts as you head into '18. As I -- as you look at -- across these units, you talked about seeing momentum in both the segments that have been down in '17. Could we, in fact, perhaps see all 5 of these segments positive next year? Or just kind of some -- how you're thinking about that.

Sure. Well, I'm going to refrain from you any kind of 2018 guidance here, but I will talk -- as I -- I did mention the ag market. It is the beginning of the season. So this is the time when you start building backlog and looking at how the season is playing out, and I -- there's strength there. So I will highlight that, and I think that's going to carry into the first half of next year, which is -- the season typically picks up in the fourth quarter through the -- mostly through the first quarter and a little bit into second quarter. And I think that's going to be -- as they were back to a normal state there and maybe even some growth in general. So I think that market is favorable for us. We've done a good job of maintaining those customer relationships through the downturn and continuing to serve those customers well. And so I think we're well positioned there. The rest of them, I'm not going to comment now. We'll talk more at the next earnings release, Chris. But I think you can read my commentary as such.

That's positive. Well, the one area I did want to come maybe touch on a little was the Distribution side or aftermarket component, because you've done quite a bit of work there training and advancing the commercial efforts with sales. Just to understand, you're most of the way done with all of that. Are we in a spot where -- again, I appreciate you're not trying to talk about '18, but we should start to resume -- all the negative stuff has been anniversaried, I guess, at this point, and we should start to see positive trends out of that component?

I would -- I mean, that's a fair comment, that all of the negatives are anniversary-ed. I mean, there are still challenges. I'd say the challenges are -- the pockets are getting smaller and smaller, so we can focus more on specific spots. But you're going to still see some -- we've -- the product line that we exited with Patch will continue to have some runway here for the next couple quarters. But the -- NGS distribution portion, the front-facing portion of that segment, I think we're -- we've really narrowed down to some, well, specific spots where we're still having trouble with -- there's momentum in other places that's overcoming that.

Okay, one question for Matteo. With respect to -- I know you've been doing a lot of work with playing realtor, divesting and moving around different components within corporate-owned real estate and facilities. I think you guys noted you got one done in the quarter, and it brought in $6 million. What's kind of -- and appreciating there's a lot of pieces, but as you look at you've got left to do there over the next, I don't know, 12, 18, 24 months. A, could you give us a time frame on how long you think it'll take to kind of do those things? And then b, what would you estimate you'd be able to reduce debt by from either sale leasebacks or exiting altogether? And is it something that's a double-digit number in terms of millions? Or how should we think about that?

Yes. Well, Chris, so we are at the beginning of the process. As you highlighted, we just sold one. It was a good transaction. It's worth almost $6 million, so that was positive. But I would add that I would not expect that all the others will yield to the same amount. We -- but just I would focus overall on the strategy that we have here, which is really, we own today most of the facilities that we operate out of. We want to change that because we want to use some of the proceeds to lower our debt and then be ready to fire the bullets to invest in M&A activity when we're ready to do that. So that's the strategy. It's going to take, as you said it, 12, 18 months at least. We have many facilities we are working on. But I think it's a little early for me to give you a range or a number on how much this is going to really yield at the end of the project. But we are working on it.

(Operator Instructions) Your next question comes from the line of Adam Josephson of KeyBanc.

It's actually Michael Leblanc sitting in for Adam. Just a couple from me on cash flow. First, can you talk about why exactly you cut your CapEx guidance for '17? And then I think if I'm not mistaking, your CapEx is only about 1% of sales this year. So do you think that's a sustainable level going forward?

So the -- let me talk about a couple of things. I think the -- in order to understand, I think, the CapEx level of this year, we need to take into account the focus of the team -- what the focus of the team has been this year, which really, we had a few initiatives: lean, the Material Handling realignment and the 80/20 sales initiative. So the team was mostly focused on these 3 key items, which drove, obviously, a lower CapEx expenditure in 2017.

I will also stress the fact that, particularly, for example with lean, the team is doing a fantastic job. In some product lines, the team was able to increase the capacity just by working on the cycle time, working on the efficiency of the equipment rather than doing the old way, which would have been purchasing new equipment, which also drives a depressed CapEx expenditure. So I would say we -- back to the second portion of your question, I think the CapEx level of this year, for this reason I just mentioned, is pretty low. We are expecting CapEx in 2018 to be definitely higher and more probably in the range of the $10 million, $12 million that we were expecting to have in '17. But we will give you probably a better outlook on the CapEx when we talk in the next earnings call.

Let me add one piece here. I mean, capital spending is driven by 2 things: one is capacity, which is a function of productivity; and two is new needs. You can also solve all of those problems with partners. And so it's really not appropriate for you to look at history to understand what our capital profile is moving forward. It's irrelevant, frankly.

So we're -- first of all, with -- our lean activities are getting much more efficient in productivity. So if you can measure productivity properly, which we can, and you improve that, you don't need as much capital. When you have partners that can do ancillary things or even, in some cases, primary things that are not super important to your value proposition, you can use that as well. Those 2 things alone significantly reduce our capital needs. And then there's going to be things where we're inventing something new that is very unique in that we have do ourselves and we're going to spend growth capital on that. And you're going to see some of that this winter, and that's the way it works. So just using an academic ratio is not the way to look at our business.

Okay, that's helpful. And just one more on working capital. So you're obviously running below the 9% target. Can just talk about how much room you think you have left to improve on that front?

Michael, I would say the -- we always -- we are big believers of continuous improvement, so we always look at opportunities to do better, to negotiate better terms with our suppliers, payment terms, collect receivables earlier, avoid having past dues. So this is a continuous focus of the team. Now if you look at -- which is one of the reasons why we -- the team has done a fantastic job this year in working capital. I think if you look at where we are today, this 7.5% of our sales, I don't think you will see a big step improvement compared to where we are today.

There are no further questions in the queue at this time. I'll turn the call back over to Monica Vinay for final remarks.

Thanks, Jodie. Thanks, everyone.

This concludes today's...

(inaudible) another call.

Chris?

Oh, certainly. Your next question comes the line of Chris Manuel of Wells Fargo.

I just wanted to ask one follow-up. I'm sorry, I apologize. When you guys talk about a full pipeline and looking at different transactions, things of that nature, I know it's always difficult to handicap or be that precise. But do you feel that you've got activity or things that are reasonably in the horizon, i.e. the next 12 months, that you feel you can get something done? Or is it more exploratory at this point? I mean, I know you've put together kind of a team from the C-level suite. You've re-changed a lot of the upper-level management. So you've kind of got a lot of the heavy lifting done. How would we think about the opportunity over the next -- to get something across the finish line perhaps in the next 12 months?

Yes, Chris, I'll answer that. The -- M&A is a -- can be feast or famine. It's very lumpy. It's -- timing can be short fuse or long tail. I think we're actively participating. I wouldn't say it's exploratory in any sense. So the market is very strong right now. There's a lot of -- I mean, it is a sellers' market, so you have to be careful from a pricing standpoint for sure. But we're looking at a lot of stuff. It's a very busy part of our activity level right now, and it's not just exploratory. There is some of that. I mean, you build a funnel by exploring and trying to understand certain targets in the market and learning their business and trying to understand whether it's a good fit. But there are quite a few other activities that are more robust. Not all of them are going to play out. We have to evaluate each deal as it comes across. But it's a -- if I was -- if you were asking whether it's feast or famine, the market is feast right now. But of course, it can also be fraught with risks. So we're very -- you know me well enough to know that I'm very careful and conservative person, and we're -- we evaluate each one very carefully. But it is a big part of what we're doing right now.

Your next question comes from the line of Chris McGinnis of Sidoti & Company.

You may have gone through this. I've been jumping on a different -- couple different conference calls. Can you just maybe talk a little bit about the strengths in the quarter on Material Handling? And with the stronger end market-related new product offerings, can you maybe just dive into that? Again, sorry if you've already been asked this question.

No, it's a slightly different way of framing it than others have asked. So not a repeat, Chris. The -- there is some market strength I'll go through. So it's not -- none of the what -- the strength we saw in the quarter was new products. I mean, we haven't launched anything yet this year that's -- that qualifies for that. What I would say is the -- in the vehicle markets, the RV market is very strong right now. Where I think we're winning there is that we're -- our operations there are performing very well, and these are customers that require -- they don't carry a lot of inventories. They require a lot of just-in-time type of deliveries. And our team has done a phenomenal job, and I think we're gaining share because of that. In the food and beverage markets, it's a tale of 2 things. It's -- on the food processing side, the team has done a wonderful job of seeking out new opportunities and winning those. And so we had added some customers. So that's good, old-fashioned selling right there and targeting. And that's with existing products that we have that we think we have good runway with. The ag market is a bit of a market rebound. I think that farm income is projected to be slightly up this year. Not a V-shaped recovery by any stretch, but I think that market's returning to normal. And we are the premier packaging for seeds. And so when the market starts coming back, our customers come back. And so that's been helpful for us as well. And then lastly, our -- in our consumer market, the portable fuel containers, we did see some lift in the quarter from storm events that occurred in Florida and Eastern Texas, but that business has also done a phenomenal job of gaining share this year. So their momentum has been going strong all year. We did have -- again, I -- some of the lift we saw in the third quarter was from that, but it's not the whole story. Yes, that business continues to perform really well just from a pure commercial execution standpoint, and we see that momentum continuing in the fourth quarter.

Okay, great. And then just a last question, and you may have touched on this. But just the outsourcing initiative, can you just maybe give us an update of where you're at and how you're kind of seeing that fit into the -- your playbook over the next few years?

Sure. It's -- we largely have completed the bigger chunks of that through the third quarter. And essentially, the strategy there is to find people who are better at some of the basic things that we do than we are. Sometimes, that's because they have capital equipment that we don't have or don't want to have. Sometimes, that's just because they have some expertise that we don't have. And sometimes, it's purely because the operation itself is a fairly basic one and it's not something we need to be doing inside of our buildings. And so we found a number of great suppliers through that process, and we have given each of them -- the strategy with supply chain is you don't want to have your eggs all in one basket, so to speak, but you want to have good partnerships. So our suppliers have great opportunity to continue to grow their business with us if they perform. So far, that's been a positive. We've seen some good performance out of most of them. And that's the relationship we want to have with them, is that we use them as great external partners and allow them to grow their business while we're also growing. So it's a -- I think it's a mutually beneficial-type relationship, and we're seeing that with some very, very good suppliers that we've been able to find.

There are no further questions in the queue at this time. I'll turn the call back over to Monica.

Thanks, Jodie.

This concludes our call for today. Thanks, everyone, for joining us and for your interest in Myers Industries. As a reminder, a transcript of this call will be available on our website immediately after this event. A replay will also be immediately 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.