Grant Fitz; Chief Financial Officer, Executive Vice President; Myers Industries Inc
Christian Zyla; Analyst; KeyBanc Capital Markets, Inc.
Hello and welcome to the Myers Industries Q3 2024 earnings call. My name is Elliot and I'll be coordinating your call today. (Operator Instructions)
And I have to hand over to Meghan Beringer, Director of Investor Relations. Please go ahead.
Thank you, Elliot. Good afternoon, everyone. And thank you for joining Myers conference call to review 2024 third-quarter results.
I'm Meghan Beringer, Senior Director of Investor Relations at Myers Industries. Joining me today is Dave Basque, our Interim Chief Executive Officer; and Grant Fitz, our Executive Vice President and Chief Financial Officer.
After the markets closed today, we issued a press release outlining our financial results for the third quarter of 2024. We have also posted a presentation to a company today's prepared remarks which is available under the investor relations tab at www.myersindustries.com. This call is being webcasted on our website and will be archived along with the transcript of the call shortly. (Events Instructions)
Please turn to slide 2 of the presentation for our safe harbor disclosures. I would like to remind you that we may make some forward-looking statements during this call. These comments are made pursuant to the safe Harbor provision of the Private Securities Litigation Reform Act of 1,995.
Such statements are based on management's current expectations and involve risks, uncertainties, and other factors which may cause results to differ materially from those expressed or implied in these statements. Also, please be advised that certain non-GAAP financial measures such as adjusted gross profit, adjusted operating income, adjusted EBITDA, and adjusted earnings per share may be discussed on this call.
Further, information concerning these risks, uncertainties, and other factors are set forth in the company's periodic SEC filings and may be found in the company's 10-Q filing.
Please turn to slide 3 of our presentation as I will now turn the call over to Dave Basque.
Thank you, Meghan. Good afternoon, everyone, and welcome to our third-quarter 2024 earnings call.
I'm pleased to speak with you as Myers' Interim President and CEO. I would like to thank the Board for entrusting me to lead Myers Industries through this time of transition. I'm confident that together with the support of the Board, we will continue to make improvements to move Myers forward.
Now, let's discuss the highlights of the third quarter. Please turn to slide 4. During the quarter, the addition of Signature Systems to the Myers portfolio, along with Scepter's strong performance, allowed for sales, gross margin, and adjusted EBITDA growth. For the quarter, Signature was the primary driver of our gross margin expansion due to their highly differentiated product line. Scepter sales increased about 60% versus the prior year driven by additional contracts and revenue in the military end market and the delivery of fuel cans to help those impacted by recent hurricanes.
These two power brands helped us grow during the quarter and demonstrate the benefit of developing similar branded products to drive Myers' growth. Demand headwinds persisted in several end markets, notably in recreational vehicles, marine, and automotive aftermarket.
In addition, we are now seeing reduced demand in the food and beverage end market as many of our customers are delaying capital spend, given current macroeconomic conditions. We anticipate cautious customer spending behavior for the remainder of the year and likely continuing into 2025.
In response to these challenges, we are increasing our sales activity in the affected markets and introducing an added tranche of cost cutting initiatives that will yield $15 million in annualized savings. These initiatives are incremental to the previously announced $7 million to $9 million cost improvement plan and $8 million in synergies from Signature acquisition. This will strengthen our cost position and help mitigate revenue headwinds. The benefit of these actions are on schedule to fully -- be fully realized by the end of 2025.
During the quarter, we also paid down $5 million of our Term A loan amortization and $8 million of our revolver, totaling $13 million of debt pay down. We remain committed to reducing our leverage ratio to approximately 2x by the end of next year, positioning Myers for future expansions -- acquisitions. Given the current conditions, we are reducing our full-year guidance to the range of $0.92 to $1.02 adjusted earnings per diluted share.
Slide 5 of today's presentation is a reminder of our strategic lens. Our storage handling and protection portfolio is comprised of four power brands. They are Buckhorn, Acro-Mils, Scepter, and Signature Systems. This portfolio is positioned to grow while we focus on maximizing the value of our engineered solutions and automotive aftermarket portfolios.
Slide 6 summarizes many of the actions that we have taken during the third quarter. Scepter was well-positioned to rapidly respond to the spike in demand for portable fuel containers in support of hurricane recovery efforts. Scepter is also working on winning new contracts for our lightweight military ammunition containers, which continue to see strong acceptance in end market. We also have strong sales momentum for Signature's MegaDeck ground protection product.
We are expanding our product offerings through our e-commerce channel, which is growing faster than the industry average. Continued investment in our power brands and the e-commerce channel will fuel Myer's future growth.
Across our engineering solutions and automotive aftermarket portfolios, we continue to focus on improving cash flow as they have been adversely impacted by current macroeconomic conditions.
In late September, we appointed a new leadership team for our distribution business. This team has significant experience in operational excellence, specifically in cost reduction and revenue growth. In a short amount of time, they've defined a series of positive actions to improve the business, focusing on commercial and operational effectiveness. We expect to see the results of these actions in the coming quarters.
Turning to slide 7, let's review a few examples of how our power brands are growing. In this past quarter, we saw a spike in the use of Signature products by customers who were assisting in storm restoration efforts and Signature's customer base is growing. Over 20% of their 2024 revenue will come from new customers.
Additionally, turning to slide 8, we anticipate that Scepter will continue to grow. They are on track to exceed the 2024 forecast of $25 million of military sales. The Scepter team was also awarded the Pro Tool Innovation Award for its recently launched powered fueling station. This award highlights groundbreaking tools and fasteners for leading industry manufacturers.
In summary, the sales of our power brands are growing. However, our consolidated results during the past quarter did not meet our expectations and we're taking both operational and commercial actions to improve our results.
Now I'll turn the call over to Grant for a detailed review of our third-quarter financial results and updates to our outlook.
Grant Fitz
Thank you, Dave. I would like to begin on slide 9 to go over the full summary of the third quarter 2024 financial results.
Net sales were $205.1 million, which increased $7.3 million or 3.7% compared to the third quarter of 2023, with the increase driven by both the Signature acquisition and strong demand for Scepter products in both military end market and for fuel containers, offset by lower pricing and volumes across the other segments.
Our quarterly adjusted gross profit was $66.3 million, an increase of $3.7 million or 5.8% compared to Q3 of last year. Adjusted gross margin was 32.4% compared to 31.7% in 2023. The favorable variance in adjusted gross margin was largely driven by the acquisition of Signature, favorable product mix, and lower material costs, partially offset by lower pricing and volume.
Selling, general, and administrative expenses increased $4 million or 9.1% to $47.7 million due to the acquisition of Signature, partially offset by cost savings initiatives and reduced variable compensation. SG&A as a percentage of sales increased to 23.3% in the third quarter of 2024 compared to 22.1% in the same period last year.
Operating income in the third quarter decreased to a loss of $4.8 million as compared to $18.7 million in Q3 of 2023. In the corner, we recognized a $22 million non-cash charge for goodwill impairment related to the rotational molding business within our material handling segment. The impairment primary results from the continued anticipated market headwinds that we have seen in that business. The charge does not affect cash (inaudible) compliance.
On an adjusted basis, operating income increased to $20.5 million compared to $20 million in the third quarter of 2023. Third-quarter adjusted EBITDA was up to $30.7 million versus $25.6 million in the prior year quarter. Adjusted EBITDA margin was 15% compared to 13% in the third quarter of last year, primarily associated with Signature's high margin profile. Diluted adjusted earnings per share was $0.25 compared to $0.38 in Q3 of 2023 with a difference largely driven by increased interest expense related to the term loan which was used to finance our acquisition of Signature.
For an overview of each segment's performance, please turn to slide 10. For the material handling segment, net sales increased to $18.2 million or 13.8% compared to the prior year. Sales from Signature and Scepter's military and gas can growth were partially offset by sales declines, primarily in seed boxes and IBC paste containers within the food and beverage end markets as well as continued headwinds in the RV and marine end market.
Material handling's adjusted EBITDA increased $8.3 million or 33% to $33.5 million and adjusted EBITDA margin increased to 22.2% or an improvement of 320 basis points compared to the prior year. The positive margin improvements were attributed to the Signature acquisition, partially offset by higher material costs and lower sales volume and pricing.
Net sales for the distribution segment decreased $11 million or 16.8% year over year to $54.4 million, driven by lower volume and pricing, partially offset by improved SG&A costs. Adjusted EBITDA for the distribution segment decreased $3.4 million or 51.8% to $3.2 million resulting in an adjusted EBITDA margin decreasing 430 basis points to 5.8% as compared to 10.1% in the prior year's quarter. The variances in EBITDA and margin performance as compared to Q3 of last year were primarily driven by decline in sales volumes and pricing, partially offset by favorable sales mix.
Turn to slide 11, as prefaced earlier, we are continuing to identify and execute an additional -- on an additional tranche of cost cutting initiatives with an annualized savings goal of $15 million, which is incremental to the original $7 million to $9 million target and $8 million in Signature synergies. Generally, these additional initiatives will be driven by labor savings, manufacturing efficiencies, and other savings initiatives. These new cost-saving actions will also help to mitigate the continued revenue headwinds that we are seeing in several of our end markets.
The annualized cost improvement plan will also continue to drive our transformation as Myers evolves into a simpler, more efficient organization and better positions the company to accelerate growth when market conditions improve.
Turning to slide 12, free cash flow for the third quarter of 2024 was $10.1 million compared to $18.1 million for the third quarter of 2023. Working capital as a percentage of sales was up compared to the third quarter of 2023 due to timing of receivables and increased seasonal inventory levels at Scepter and increased inventory at Patch Rubber.
Capital expenditures for the third quarter of 2024 were $7.2 million, reflecting additional investment in production capacity and maintenance projects. Cash on hand at quarter end totaled $29.7 million. Our debt to adjusted EBITDA ratio on a pro forma basis for the trailing 12 months at the end of the third quarter was 2.7 times, up slightly from 2.6 times in the second quarter, primarily due to the lower quarter-over-quarter earnings.
As Dave mentioned in his introduction, during the quarter, the company paid down $13 million in debt with $5 million for the term loan A amortization and $8 million for the revolver.
On slide 13, I want to reiterate Myer's capital allocation priorities. As noticed, we are focused on creating a simplified Myers through cost-cutting initiatives and increasing revenue and volumes via the strength of our four power brands. Additional cash on hand will be allocated first to pay down debt. Myers is focused on maintaining a sound balance sheet with ample liquidity to support the company's investment priorities.
Now please turn to slide 14, which shows our updated outlook for fiscal year 2024 and our prior guidance. We are reducing our full year guidance to reflect softer demand in several of our end markets, which we discussed earlier in this presentation.
Our new guidance ranges are net sales growth of zero to 5%. Net income per diluted share in the range of $0.11 to $0.21. The prior outlook was $0.76 to $0.91. Adjusted earnings per diluted share in the range of $0.92 to $1.2. Capital expenditures in the range of $28 million to $32 million with an effective tax rate remaining at approximately 26%.
Turn to slide 15, our third-quarter results were significantly impacted by unfavorable macroeconomic conditions affecting some of our end markets. We are looking to the future and remain committed to executing our strategic priorities and driving growth across Myers Industries.
We are executing on our long-term strategy. Our $350 million investment in Signature is delivering strong results. We are positioned to acquire additional businesses with strong brands that hold top positions in profitable niche markets.
We are also implementing $15 million in new annualized cost savings. These actions will help to mitigate the pressures from end market headwinds, enabling us to remain competitive. And a core priority is improving our distribution business. The new leadership team is identifying positive actions to improve the performance of this business.
Finally, we are increasing our participation in high growth end markets including sectors such as military and infrastructure and expanding our e-commerce channel to capitalize on new sources of demand. These proactive steps will improve our cost competitiveness and position Myers for longer-term growth as demand in some of our end markets recover.
With that, I'd like to turn the call over to the operator for a question. Operator?
Operator
(Operator Instructions) Christian Zyla, [KeyCorp].
Christian Zyla
Thank you. Good afternoon, everyone. First question, Dave. I know you've been at Myers for four years now. But as you've been in the CEO seat for the last two months, what have you been focused on? And in which parts of the business do you think you can make the biggest impact?
Dave Basque
Well, we're focused on two areas. One is growing our power brands. And secondly, we're focused on optimizing our -- getting our cost in control for our engineered products businesses, primarily. So we've been developing a slate of plans to achieve those objectives. It's been a busy time for us. I've learned a lot, but yeah, those areas are primary focus.
Christian Zyla
Great. Thanks. And then I guess, as the year has played out, where have you guys been the most surprised with the performance of your four power brands? And where do you see the most upside in the near term or midterm?
Grant Fitz
Yeah. Hi, Christian. This is Grant. So I would say, looking back at the year, for the bulk of the year, we've been facing headwinds, as we've been talking about, with the RV and marine as well as in our automotive aftermarket with the distribution business. So that is -- it continue to unfortunately be something that's been in front of us throughout the year.
I think what's changed since the last time we talked in our Q2 earnings is that we're seeing now some continued -- some additional headwinds in our food and beverage end market, particularly with the seed containers as well as our IBC paste containers. We have anticipated that we were going to see some declines with the seed containers, just because last year was a record and certainly, there's a seven-year cycle within that product.
We were hoping to offset that with some -- to some degree with our industrial boxes as well as our IBCs to some degree. That hasn't happened to the full extent. And so I think that's probably the piece that has changed the most since we last met after the Q2 earnings. The additional issue is that I think we've also just recognized that our distribution business, we need to make some changes and we need to go -- move forward to really get that business back on track and start to work towards growing the business.
We've talked a lot in the past on some of the Mohawk integration issues. I think our focus now is what can we do to improve the overall commercialization of that business looking at where we might have gaps with sales coverage and we might have issues that we need to win back customers that we had lost through the Mohawk transition as well as just focusing on cost reductions in that business as well too.
And we're pretty excited about the team that's been put in place. We think they've got really some strong capabilities. And it's not just been the leader of the business. We've also made some significant changes with other leadership members for the distribution business.
Christian Zyla
Thanks. I guess, that tees up my next question pretty well. So your ETS guide suggests 4Q in a range of $0.07 to $0.17. So should we be thinking that distribution will post negative margin? Or is it positive and you expect a significant reduction in the material handling margin?
Grant Fitz
Yeah, it's going to be probably a mix of crossings. In general, we might have a little bit of seasonality with the fourth quarter. Some of our businesses, things start to slow down a little bit for that fourth quarter. So there is some margin impact just with the lower volumes that we would have with the material handling business.
I wouldn't throw in the towel on a negative margin quite yet on the distribution business. We would like to continue to have that business be profitable and continue to grow profits over the longer term. But we have work to do in that business without question. As I mentioned, with some of the leadership changes that we need to putting in place for that.
You did ask in the prior question; I probably didn't address it as well. It's just in terms of the upsides that we see for the business. We really do see some significant continued upside with, in particular, the military business for Sceptor. We've talked about growing that business from, I think, it was $11 million last year to over $25 million this year. And we projected that we will get up to $40 million next year. It's a really strong continued improvement there as we both ramp up some of the contracts and the capacity that we've put in place for that business.
Additionally, we will get some further tailwinds from some of the hurricane activity, storm recovery activity in the fourth quarter is that those two hurricanes essentially balanced between Q3 and Q4 in the timing of that. So we see some upside opportunities potentially with that or just the quarter just as we balance that out.
Additionally, we feel very, very good about the Signature business, continue to see strong demand for the infrastructure projects. And that business, we continue to see longer-term growth and continue to drive that forward. And as we talk about the e-commerce, continues to do well for us and helps to support not only our four power brands but also other parts of our business, including the rotational molding business with our RV, tank sales .as well as in our distribution business.
Christian Zyla
Great. Thank you. So last one for me and then I'll jump back in queue.
But just going on that e-commerce point is -- can you just give us an update on the e-commerce strategy? What's been working? And then, are there other parts of your portfolio that you look at and think can benefit from opening up some e-commerce or DTC channels? Thank you.
Dave Basque
Yeah, we continue to -- Akro-Mils is our largest product line that's sold through e-commerce. We continue to grow that. It's primarily through Amazon. We're learning and growing in our ability to influence the sales through Amazon. So we're getting better at that, and that's helping drive our increases. But we're also launching new product lines through Amazon, for example, in the roto products and also some distribution products and Scepter. So those are all helping to fuel growth.
We spent a lot of -- we have a team focused on that. We spent a lot of effort on that and there's a -- in order to -- it's a fine line really when you're working with Amazon because you're constantly managing the competitive profile and -- but we're getting better and better at that, and that's resulting in greater sales and also substantial margins for that product.
Operator
William Dezellem, Tieton Capital Management.
William Dezellem
Thank you. Two questions. First of all, does Jeff and the new distribution team come with salespeople or relationships with salespeople that they can bring in to -- quickly to help fill the [disti] gaps or will there be a more traditional recruiting process to bring additional people in?
Dave Basque
Yeah, I think there's a little bit of both there, right? They do have relationships in the industry and they're already taking action to bring certain sales people on board. But we are also recruiting. They've done a very good job of analyzing the territories, a very good customer analysis to determine where we have coverage gaps, and they're working rapidly to fill those positions.
Grant Fitz
The other thing I would just add, Bill, is we are here in Las Vegas at the SEMA conference this week. So that's one of the largest auto aftermarket conferences. And just, in short order, the team has really done a nice job of putting together a very big promotional program that's been sponsored by our suppliers that we really are pretty excited about to see that we might get some additional incremental volume that we haven't quite anticipated completely through this activity here this week.
So just in a short time, the team has been there for probably less than a month, but they really have come up with some good analysis, as Dave mentioned, but also good -- fresh thinking about ways that we can leverage some of our existing channels and also leverage things like this with the event that we have here this week.
William Dezellem
Great. That's helpful. And then back to the original cost savings of $7 million to $9 million, what was the original anticipated timeline for that to be fully implemented?
Grant Fitz
Bill, this is Grant. It's similar to what we have with the $15 million, probably a little bit more front loaded because we had an earlier start on that. And we did announce some closures that we had with our distribution system or distribution centers as well as our Atlantic roto molding facility.
So I would say, in general, we're probably going to continue to implement those 2025 but I would -- and we should be up at a full year run rate by the end of the year. But that would definitely be probably a little bit ahead of time versus the current tranche that we've identified at the $15 million. So we may not be giving you a firm guideline of the exact timing. But I would say in general that first tranche should be implemented earlier than the second tranche.
Operator
Nick Toor, BlackRoot Capital.
Nick Toor
Thank you. Just to follow up on the previous question. Are any of the cost cutting measures, the tranche one or the tranche two, reflected in your third-quarter results?
Grant Fitz
For the most part, Nick -- this is Grant. We were really implementing our tranche one initiatives in Q3, so not a significant impact with the Q3 results. We will get some of that in Q4. But again, we will be continuing to implement those initiatives throughout 2025.
But I would say that we'll start to pick up some momentum from some of those initiatives. Really looking at it, potentially offsetting some of the headwinds that we've talked about with some of our end markets. So it is something that we want to continue to keep a very close eye on, on just how the markets develop and where we're at in terms of accelerating those actions.
Nick Toor
Okay, great. So nothing really is reflected in your EBITDA in the third quarter, but we should start to see some of those in the fourth quarter already. And 2025 is where we see sort of the full impact.
Grant Fitz
That's correct. Yeah.
Nick Toor
Okay, great. And then in terms of your distribution business, if you could just give me a sense of, how does that business strategically fit with what you're trying to accomplish in terms of hydrating your portfolio? What is sort of the strategic rationale continuing to keep it as part of Myers?
Dave Basque
Yeah. Well, we -- distribution is an important part of Myers heritage. I mean, Myers was founded on -- one of the original businesses was the distribution business. The original business was a distribution business. We're very committed to improving that business. So we've got a lot of -- we're focusing a lot of effort, and we put some of our best operations and commercial people on it now to improve that business. So that's our stance; certainly, is that our main focus on that distribution business is to return it to the profitability levels that we've enjoyed in the past and improve from there.
Nick Toor
Okay, I mean, I guess it's one shareholder's opinion. But it just seems -- it's a lower-margin business. It doesn't have a secular growth profile and maybe once you've turn it around, it's maybe better than somebody else's portfolio.
But just going back to the guidance, you guys have given a few quarters back of 10% organic growth profile on the top line. Is that sort of still your thinking generically going forward that that is the growth profile of the business?
Grant Fitz
Yeah, I would say, in general, we still see very strong growth profile opportunities for the, the four power brands. And so I would say that we're moving away from that. We certainly have some headwinds that we're dealing with in the food and beverage area. But we really continue to see very strong growth profile with the Signature business, with our Scepter business, and also, with the Akro-Mills business and Buckhorn business, we expect those to continue to grow in the future.
So no, I wouldn't say there's any significant change there. The one that's been disappointing to us obviously has been our distribution business, our automotive aftermarket with the declines that we've had this year. We really want to continue to focus on both on the cost side as well as how we can improve the revenue trends that we've seen in that business. But I would say, as we put those measures in place, we've looked at -- I believe we had said basically the distribution business and our engineered solutions portfolio would be essentially GDP type of businesses in terms of the growth levels.
Operator
We have no further questions. So this concludes our Q&A. And I hand back to Meghan Beringer for any final remarks.
Meghan Beringer
Yeah, thank you, everyone, for joining us today. If you have additional questions or would like to schedule time with our management team, you can contact me. My information is on slide 16. Thanks for your interest in Myers, and have a great day.
Grant Fitz
Thank you.
Dave Basque
Thanks, everyone.
Operator
Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
