OP Bancorp Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, welcome to the Myers Industries Q2 2024 Earnings Call. My name is Kenneth, and I will be coordinating your call today. I will now hand you over to your host, Megan Boehringer to begin. Please go ahead.

Speaker 1

Thank you, Kenneth. Good morning, everyone, and thank you for joining Meijer's conference call to review 2024 Second Quarter Results. I'm Meghan Behringer, Senior Director of Investor Relations at Meyers Industries. Joining me today is Mike McGaugh, our President and Chief Executive Officer and Grant Phipps, Executive Vice President and Chief Financial Officer. Earlier this morning, we issued a press release outlining our financial results for the Q2 of 2024.

Speaker 1

We have also posted a presentation to accompany today's prepared remarks, which is available under the Investor Relations tab at www.myersindustries.com. This call is also being webcasted on our website and will be archived along with the transcript of the call shortly after this event. After the prepared remarks, we will host a question and answer session. 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.

Speaker 1

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. Also, please be advised that certain non GAAP financial measures such as adjusted gross profit, adjusted operating income, adjusted EBITDA and adjusted EPS 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 filings. Now please turn to Slide 3 of our presentation.

Speaker 1

I'm pleased to turn the call over to Mike McGaugh.

Speaker 2

Thank you, Megan. Good morning, everyone, and welcome to our Q2 2024 Earnings Call. I will begin today with a review of the performance highlights from the Q2. I will discuss the progress we're making in executing our strategy and I will then hand the call to Grant to review in detail our financial results and outlook for the remainder of the year. Our Select second quarter results were bolstered by the solid performance of our recently acquired Signature Systems business.

Speaker 2

These results reflect the company's 1st full quarter with Signature Systems. This business is benefiting from worldwide investments in infrastructure and enabled Myers to outpace the demand headwinds in the recreational vehicle, marine and automotive aftermarket end markets. Combined with our cost reduction and operational improvement initiatives across the company, Signature helped us drive an expansion in gross margin, operating margin and adjusted EBITDA margin sequentially and year over year. Meijer's 2nd quarter adjusted EBITDA of $38,900,000 and an adjusted EBITDA margin of 17.7% is a strong quarter in terms of performance. Adjusted diluted earnings per share also improved year over year.

Speaker 2

As I highlighted at our Investor Day earlier this spring, we anticipated demand to be choppy through this year. As I said then, we're not out of the woods yet. Indeed, we are seeing continued soft demand in our sales to the recreational vehicle, marine and automotive aftermarket end markets. In our food and beverage end market, we know that the seed box business is also cyclical. Following years of seed box sales following strong years of seed box sales in 20222023, 2024 is showing signs of cooling demand.

Speaker 2

We are growing our industrial box business to help mitigate the volume decline of seed going forward. In light of the softer demand, we continue to take actions to reduce cost and increase productivity across the company. These actions include the consolidation of 3 distribution centers in our Myers Tire Supply business as well as today's announcement of the consolidation of our Atlantic Iowa rotational molding facility into our other rotational molding facilities in Indiana. We were able to reduce our footprint and reduce our cost due to the productivity gains that I've spoken about in past calls. We expect these closures to be completed in 2025 and the resulting annual cost savings of approximately $5,000,000 to be fully realized in 2025 as well.

Speaker 2

With these actions, we are on track to deliver the $7,000,000 to $9,000,000 in annualized cost savings we've committed. These savings will impact the income statement in 2025. In addition, we are also on track to deliver the $8,000,000 in annualized cost synergies in 2025 in connection with our acquisition of Signature Systems. Grant will speak to our cost savings and synergy progress in more detail in his segment. I'm confident that our productivity improvement and cost reduction initiatives will help us navigate the cyclical demand conditions some of our end markets are experiencing, while also positioning the company favorably for when these conditions revert to stronger levels of demand.

Speaker 2

As a result of the continued soft demand condition in the referenced end markets, we felt it was prudent to lower our full year adjusted earnings per share guidance to a range of $1.05 to $1.20 Grant will provide a more detailed discussion of our outlook momentarily. But before I hand the call over to Grant, I'd like to speak a few moments reviewing our strategy that continues to guide our decisions and actions as we transform Meyers Industries. Please turn to slide 4, which provides a reminder of the 3 Horizon strategy roadmap that we have followed for the last 4 years. In Horizon 1, we built a strong foundation of operational and commercial excellence. We gained experience and scale through smaller bolt on acquisitions and as a result, we were well positioned to announce our acquisition of Signature Systems, largely accomplishing our Horizon 1 goals by our 2023 target date.

Speaker 2

As we enter the 2nd horizon of our journey, we are building on the fundamentals established in Horizon 1 to transform Meyers into a stronger, simpler, high margin growth oriented company. We believe this strategy and our approach to acquiring and building businesses that have branded products, higher barriers to entry, clear long term growth tailwinds and significant commonalities with our 4 power brands will unlock meaningful value creation from Myers Industries long term. Slides 56 of today's presentation are a reminder of our Horizon 2 strategic imperatives in the resulting strategic lens. This includes a focus on growing the storage handling and protection portfolio as well as a focus on maximizing the value of our engineered solutions in automotive aftermarket portfolios. On slide 7, we summarize the progress we've made since our Q1 earnings call.

Speaker 2

Notably, we are continuing benefit from strong growth at Signature Systems as well we are realizing gains in productivity and taking cost reduction actions in our engineered solutions and automotive aftermarket portfolios. Within the storage handling and protection portfolio, we have a long runway for growth in the infrastructure and military end markets and we continue to invest capital and innovation in this portfolio. In the Engineered Solutions and Automotive Aftermarket Portfolios, we are focused on maximizing value by driving further improvements in efficiency, reducing our cost, maximizing cash flow while delivering excellent value to our customers. These ongoing initiatives combined with improved growth and profitability across the portfolio and contained continued contribution from our 4 power brands listed on slide 8 will help us maximize cash flow and delever appropriately, an important priority for us following the acquisition of Signature Systems. In summary, we believe our 2nd quarter actions and results demonstrate meaningful progress on our path to transform our company, and we are confident that the strategy we are implementing will drive long term shareholder value creation.

Speaker 2

Now I will turn the call over to Grant for a detailed review of our Q2 financial results and updates to our outlook.

Speaker 3

Thank you, Mike. I would like to begin on Slide 9 to go over the full summary of the Q2 2024 financial results. Net sales were $220,200,000 which increased $11,800,000 or 5.7 percent compared to the Q2 of 2023 with the increase primarily driven by the Signature Systems acquisition, which contributed 15.2 percent of inorganic sales growth as compared to Q2 of last year, partially offset by a 9.6% organic sales decline related to lower pricing and volumes in both the Material Handling and Distribution segment legacy businesses. Our quarterly adjusted gross profit was $79,600,000 an increase of $11,000,000 or 16 percent compared to $68,600,000 in Q2 of last year, largely driven by the Signature Systems acquisition and partially offset by an adjusted gross profit decline in our legacy business. Adjusted gross margin was 36.1% compared to 32.9% in 2023.

Speaker 3

The variance in adjusted gross margin was driven by the acquisition of Signature Systems, favorable product mix, and lower material cost, partially offset by lower pricing and volume. Selling, general and administrative expenses decreased $1,800,000 sequentially or 3.4 percent $700,000 year over year or 1.3 percent to $51,700,000 SG and A as a percentage of sales decreased to 23.5% compared with 25.8% in the Q1 of 2024 and 25.1% in the same period last year. Excluding contributions from Signature Systems, SG and A expenses declined 18% year over year and SG and A as percentage of sales would have been 22.8 percent driven in part by lower incentive compensation accruals reflecting Meijer's full year outlook and other cost savings initiatives. Adjusted operating income in the 2nd quarter increased 51.5% year over year to $28,800,000 as compared to $19,000,000 in Q2 of 2023. 2nd quarter adjusted EBITDA was $38,900,000 which increased 57.4% compared to the prior year quarter, again largely driven with the addition of Signature Systems.

Speaker 3

Adjusted EBITDA margin increased 580 basis points to 17.7% from 11.9% in the Q2 of last year. And as Mike mentioned, this is one of our strongest quarters of adjusted EBITDA margin adjusted EBITDA performance in recent history. Adjusted earnings per share was $0.39 compared to $0.35 in Q2 of 2023 with the variance compared to the Q2 of last year driven by the improvement in sales and operating margins offset by increased interest expense related to the term loan, which was used to finance our acquisition of Signature Systems. For an overview of each segment's performance, please turn to Slide 10. For the Material Handling segment, net sales increased $22,700,000 or 15.9 percent compared to the prior year.

Speaker 3

The increase was driven by 22.1 percent inorganic sales increase related to the Signature Systems acquisition, partially offset by a 6.3% organic sales decline resulting from lower volumes and pricing. Material Handling's adjusted EBITDA increased $11,600,000 or 39 percent to $41,500,000 and adjusted EBITDA margin increased to 25 percent or an improvement of 4 20 basis points compared to the Q2 of 2023. These positive deltas were primarily driven by Signature's contribution, which was partially offset by a decrease in sales volume and pricing in our other businesses. Net sales for the Distribution segment decreased $10,900,000 or 16.7 percent year over year to $54,300,000 driven by lower sales volumes and pricing. The segment's adjusted EBITDA decreased $900,000 or 20.1 percent to $3,800,000 resulting in adjusted EBITDA margin decreasing 30 basis points to 6.9 percent as compared to 7.2% in the prior year quarter.

Speaker 3

The variances in EBITDA in EBITDA and margin performance as compared to Q2 of last year were primarily driven by the decline in sales volumes and pricing, partially offset by a favorable sales mix and material costs. Slides 11 and 12 of today's presentation provide updates on our progress to achieve our $7,000,000 to $9,000,000 in annualized cost reduction targets and $8,000,000 in synergies with the Signature acquisition. As Mike prefaced earlier, we are on our way to achieve these initiatives with the recent cost reductions and the efficiency improvements as well as the rationalization of our manufacturing footprint. These actions include the consolidation of 3 distribution centers in our Myers Tire Supply business and the consolidation of our Atlantic, Iowa rotomolding facility into our other rotational molding plants. We are able to reduce our footprint and reduce our cost due to the productivity gains we've achieved.

Speaker 3

We expect these closures to be completed in 2025 and will deliver approximately $5,000,000 in annualized cost savings. On slide 12, you will see that we are on plan with our Signature integration and we will continue to benefit from productivity and operational improvements, material savings and other initiatives. Through these combined initiatives, we will continue our dedicated efforts to self help the business, which in turn will create a new simplified Myers that is advantageously positioned for growth in the coming years. Turning to slide 13. Free cash flow for the Q2 of 2024 was $9,900,000 compared to $16,700,000 for the Q2 of 2023.

Speaker 3

Working capital as a percentage of net sales was up roughly 400 basis points compared to the Q2 of 2023, which reflects an increase from historical trends as a result of the acquisition of Signature Systems because we have the full amount of working capital, but not yet a full 12 months of Signature sales. Taking on debt is necessary to grow through our acquisitions. However, as you will see later in the deck, we are well positioned to pay down the debt with a goal to decrease our net leverage ratio under the credit agreement to below 2x within 2 years of the closing of Signature. Capital expenditures for the Q2 of 2024 were $4,400,000 and cash on hand at quarter end totaled $37,300,000 And finally, our leverage ratio under the credit agreement was 2.6 times. On slide 14, I want to discuss Meyers capital allocation priorities.

Speaker 3

As noted, we are focused on creating a simplified Meyers through the cost cutting initiatives and increasing revenue and volumes through the strength of our 4 power brands. We are focused on reducing our debt through following the recent our debt following the recent Signature Systems acquisition and we are targeting to reach a leverage ratio of under 2x within 2 years of the closing of Signature Systems. We also want to maintain a strong balance sheet and ample liquidity for our business. At the end of June, Myers had $37,300,000 of cash on hand and over $230,000,000 of a large undrawn credit facility. We will continue to fund maintenance and other CapEx requirements, although as you can see, we reduced our expected CapEx spend with the revisions to our outlook this morning.

Speaker 3

We also plan to continue with our existing practices for dividends. Finally, we will evaluate the most beneficial uses of cash to create value through additional acquisitions with targets similar to Signature with clear commonalities to our 4 power brands or potentially through share buybacks pending the timing of potential acquisition opportunities and when debt has been paid down to more historic levels. Now please turn to slide 15 for an update on our outlook for the fiscal year 2024. We are revising our full year guidance to reflect the slower demand and challenges within certain end markets and the broader macroeconomic conditions which we discussed earlier today. Our new guidance ranges are net sales growth of 5% to 10%, net income per diluted share in the range of $0.76 to $0.91 adjusted earnings per diluted share in the range of $1.05 to 1.20 dollars capital expenditures in the range of $30,000,000 to $35,000,000 effective tax rate to approximately 26%.

Speaker 3

Turning to slide 16, I want to highlight some of the near term growth opportunities that we foresee during the second half of the year that we are quite excited about. Signature Systems will continue to benefit from long term infrastructure improvement projects. To meet this increased demand, we are ramping up our production capacity. Additionally, we have recently launched the exciting new Diamond Track product, which is a product that removes tire sediment and mud on-site at construction and infrastructure projects. The Diamond Track allows this removal in a more economical and efficient manner versus traditional gravel.

Speaker 3

This is another example of Meijer's ability to convert markets from traditional materials to reusable composites that are more economical and environmentally friendly. On slide 17, Scepter also appears poised for growth with increasing sales of military products. Our military products serve as lightweight alternatives to most existing ammo casings, and we have successfully aligned our operational capabilities to realize this opportunity. We are pleased that these Scepter products meet virtually meet all virtual qualifications or vital qualifications, including NATO and the U. S.

Speaker 3

Department of Defense, and we secured recent contract wins in the United States, and we are also engaged in award processes for additional potential contract wins in Europe. We are estimating that the Scepter military business will grow to approximately $40,000,000 in revenue for 2025 compared to only $10,000,000 of revenue military revenue in 2023. Lastly, and just a note on the status of the current storm season, as questions start to come up at this time of year, particularly given the recent hurricane barrel, we are seeing an uptick in our 5 gallon gas can sales from an early start to the hurricane season, which resulted in significant power outages in Houston in July. We will continue to monitor the potential impacts from what is expected to be a strong storm season this year. Now, I will turn the call back to Mike for some closing comments.

Speaker 3

Thanks, Grant. Please turn to Slide 18.

Speaker 2

As I conclude my remarks, I'd like to reinforce how we are moving forward in horizon 2 of our strategy. First, throughout the quarter, we took action to improve cost and efficiency to maximize value in the engineered solutions and automotive aftermarket portfolios. I outlined approximately $5,000,000 of annual cost reductions that will impact our results in 2025 beyond. This is a component of the $9,000,000 of total annual cost reductions highlighted by Grant in his talk. 2nd, we are growing the branded products in the storage, handling and protection portfolio.

Speaker 2

We have highlighted growth projects, all largely plays where our sustainable plastic products replace another material. This is being driven across all 4 of our power brands Buckhorn, Acro Mills, Scepter and Signature Systems. 3rd, our continued work to institutionalize our commercial excellence and operational excellence gains from Horizon 1 continues to provide benefit in terms of our EBITDA margin and dollars. As a reminder, we are making these gains permanent through the establishment of our Myers business system I've discussed in prior calls. And last, we continue to position the company so that it can capitalize on long term growth trends.

Speaker 2

2 good examples are Scepter's growth runway in military applications and Signature's growth runway in infrastructure. We anticipate that these long term trends will help drive the company's growth over the next several years. With that, I'd like to turn the call over to the operator for questions.

Operator

Thank We have our first question from Jacob Moore from KeyCorp.

Speaker 4

Good morning. This is Jacob Moore filling in for Christian today. Thanks for taking the questions.

Speaker 2

Thank you, Jacob. Next one.

Speaker 4

First one for me, I'd like to ask about the sustainability of material handling margins following the Signature deal. Should we think that this quarter is a normalized level for this segment given the mixed bag of Signature relative to ongoing pressures in your core material handling markets? Or was there some variable mix benefit in 2Q?

Speaker 3

Yes. Thanks, Jacob. We did have we certainly had some improvement in the margin from the Signature Systems acquisition. So that was something that we look at as a very positive thing for the business and really gets to the hydraulics of why we thought that this was such a good acquisition for Meijer's as it really effectively starts to create the value that our 4 power brands can contribute. So I would say in general, we continue to see strong margins.

Speaker 3

As a normal basis, we will have some ups and downs with mix. We did have some favorable mix this quarter, but also we had some offset with some pricing and volume, which impacted the margins as well. And so I would say, the way we see it and we're probably a little bit more conservative on this, we would see some slight decline in gross margin in the second half of the year is what we're projecting. But that's really driven by just in general, what I would say is some conservativeness that I think we've taken as we started to look at some of these trends in the some of these key end markets that seem to be creating some headwinds for us right now? Yes.

Speaker 3

Jacob, just appreciate that question.

Speaker 2

If you on that Slide 10 where we break out the results by segment and you have material handling going from 21% basically up to 25%. That should be a good metric. We believe the storage handling and protection portfolio was we've talked about is 80% of the profit runway of the company. Those are all differentiated brands, leading brands. There's good competitive moats.

Speaker 2

There's good growth runway. And so directionally, I think that your question was a good one and that directionally the quality of the business should sustain there. Remember also in the material handling piece, you've got the engineered solutions business, which is largely a contract manufacturing business that has EBITDA margins, as we've discussed before, 10%, 12%. So it dilutes it a bit. But really that's why we are focused on driving the storage handling protection portfolio is the quality of the margins.

Speaker 2

And again, I think that that should be noted going forward as where our watermarks will be.

Speaker 4

Understood. Thank you for that. That's good color. And I think it leads well into my next one, which is the same question, but distribution. Can you provide any latest thoughts on that segment and what you're seeing in that business?

Speaker 4

Are mid single digit percent margins in distribution sustainable, given the volatility we've seen in the past few quarters?

Speaker 2

Yes. So we reported in that distribution segment of 7% EBITDA margin. As we've discussed before, we have had aspirations for higher margins in that business, either high single digits or even low double digits. What we found over the last couple of quarters is the retail tire business and the resulting tire supply business, which is where we are, is off directionally 10% year over year. When that happens, you lose some operating leverage and so you're going to unwind a few 100 basis points on your EBITDA delivery versus your expectations.

Speaker 2

That 7% give or take is directionally a good number going forward. And again, like I said, as you've got in that space, tire repair, right now anything that's impacted by high interest rates, demand is impacted by high interest rates or demand is impacted by inflation. And so right now your consumer is not buying tires at the same replacement rate as we would have expected or hoped a year ago. As a result, the wheel weights, tire valves, tire pressure sensors that we sell are also down. And so what you see in that 7% is just an unwinding of operating leverage when your revenues are off 15% year over year, which is the case with that Myers Tire Supply business.

Speaker 2

So we're trying to combat it by streamlining and we talked about the ERP work we've done over the last 6 to 9 months because we got on the same ERP system, we were actually able to reduce 3 distribution centers going from 8 down to 5. That simplifies the business, allows us to take cost out and ultimately we think that will be reflected in the margins. But 7% Jacob is probably a fair number going forward. Grant, what would you say?

Speaker 3

Yes, I would say so. I think the other important part of these consolidation distribution centers, it really is more of an efficiency play as well too because we don't see a significant deterioration in terms of any service quality levels or anything else like that. So on time delivery, we'll continue to perform well to the standards that Myers has set in the past. But I do think that we, as Mike said, we were thinking that this business might be able to improve the overall margin. We just see with some of the headwinds right now that that's probably not likely.

Speaker 3

And so I do think that range of 7% margin is a pretty good one for the future looking out the next couple of quarters.

Speaker 4

Got it. Thank you. Thank you. Just a couple more for me. Can you speak to any productivity gains that you've made in either segment that enabled the footprint consolidation?

Speaker 4

And then maybe a related question to that is with the defense business ramping, do you have available capacity? Should we see an accelerated ramp in orders from the new Scepter products?

Speaker 2

Yes. So, hey, Jacob, this is something I've talked about since I've arrived and been here for the last four, four and a half years is all this operational excellence. I talked about the sales and operations planning processes that we brought in, the sales and operations planning, software and systems, and then all the personnel we brought in from some of these large cap companies that really help us schedule our plants better, operate our plants better. And as a result, I talked about the hidden factor. We actually are unleashing and finding 20%, 30% more capacity out of a given machine.

Speaker 2

And as a result of that, it allows us to take our assets out, streamline our footprint, streamline the company, make the company simpler while we can continue to have the runway and volume to satisfy the market demand. So, it's what you're seeing in these consolidations is a proof point of all the S and OP and operational excellence work we've been doing in 2021, 2022, 2023. As it relates to the military, same story there. We actually have added some capacity, but we are able to get more units out of each machine based upon how we schedule it, how we operate it and ultimately our OEE is higher and the output of each plant is higher. And so we're able to do more with less.

Speaker 2

And so that's actually going to continue to bear fruit over the coming quarters and years. So Grant?

Speaker 3

Yes. I just would add to that some additional color. I mean, I come from a pretty strong operations background and it's been really impressive what the team has been able to do on just increasing the throughput of equipment and manufacturing processes. The other thing, Jacob, that we want to be careful about is that we still maintain capacity because we are in the trough position. And so our thought process is that as markets might pick up again in the future in some of these end markets that we have the ability with adding some additional shifts and things of that nature to really maintain and meet that those demand requirements as well too.

Speaker 3

So I think it's a good balance of efficiency improvements, allowing the consolidation, while still maintaining capacity for future opportunities when the peaks happen in the future.

Speaker 4

Thank you. That's helpful. I think doing more with less is a common theme in the military. So you're on the right track there. Last one from me.

Speaker 4

I'd like to ask about the capacity additions in Signature specifically. When do you think those additions will be fully operational? And how soon should we expect to see an associated revenue ramp as a result?

Speaker 2

Yes. So again, Jacob, I'll tell you what I can tell you recognizing that it is confidential information. So we've announced a capacity addition in 2024. We have an additional capacity addition that will come on in 2025. The directional goal for this business when we acquired it and Jeff Condino, who is the CEO of this business and his team, their directional goal is to double the business.

Speaker 2

Double the business in terms of revenue and EBITDA over the next nominally 3 or 4 years. I believe things are set up to do that and I believe that these 2 capacity additions will allow that to happen. So good business, good growth trends. One machine has been added this year. There's another one coming online that will be in place for 2025.

Speaker 3

Yes, I would just say we've when we acquired Signature, we said we expected that business to grow at least 10% annually and I think we're on a good path for that. In general, and it's very similar to the question you asked about military, we like to ramp up our capacity as the demand is there. And so there is some opportunities to meet the objectives that Mike outlined.

Speaker 4

All right. Thank you, gentlemen. It's been a good call and thanks for taking our questions.

Speaker 2

Thank you. Thanks, Jacob.

Operator

Thank you. We have our next question from Anna C. Jolley from Gabelli and Company.

Speaker 5

Hi, thanks for taking my question. It's Carolina from Gabelli. So just to start to end with the last question, Signature, can you just give an update on how you feel the integration is going to date?

Speaker 2

Yes, Carolina, it's going well. Called on the soft side, the qualitative side, the culture is enmeshing well. We really like the quality of the Signature team. And actually, it's been a nice add. The talent in the Signature team, I believe, will be additive to the rest of Meyers.

Speaker 2

So that's a win. On the quantitative piece, the financials and the delivery are coming through as we had anticipated. The integration itself, the cost out initiatives are again on track as Granite mentioned so that we have $8,000,000 of synergies in 2025. That number still holds. And so overall, Carolina, we're quite pleased with the acquisition, its performance, qualitative and quantitative.

Speaker 2

Grant, anything to add?

Speaker 3

Yes, I think it's going really well. The team's strong team. We've been able to supplement on both sides where we've had some good learnings on some of the operational processes to implement some performance improvements at Signature. But also Signature has had some areas where they've had some excellence centers of excellence type of ideas that we've been able to implement in some of our other manufacturing processes. So it's been a good opportunity to just share knowledge and really drive some of those synergies that we had identified, we felt we could achieve with the acquisition.

Speaker 5

Perfect. Thanks. And then Grant on can you just help me better understand on Page 13 kind of the difference in cash flow conversion year over year?

Speaker 3

Okay. In terms of cash flow conversion, we actually we see ourselves at essentially a 60% cash flow conversion business continuing. We have that's been kind of historically where we've been at. We don't show a specific cash flow conversion chart in our earnings presentations, but it is a good cash flow conversion business. And so we do think that may continue to improve as we get some of these improvements in place with some of the cost and things of that nature.

Speaker 3

But overall, we see that with the Signature acquisition, we have you can see that the percent of working capital has gone up. But that's really driven by, as we said in the comments, where we don't yet have the full 12 months of sales with Signature. So we think that that will start to normalize over time. Additionally, Signature does bring on a little bit more inventory than what we have in some of our other operations, but their cash conversion is really quite good. So we think that essentially offsets that.

Speaker 3

And so we should over time, I think, Angelina continue to or Carolina continue to move forward with what we've seen traditionally on a cash conversion for Myers.

Speaker 5

Great. Perfect. And then last question, just in specific to the distribution segment, it seems as if some of the overall industry or market commentary has just around cadence has been positive potentially sequentially improving in June July. Do you have any thoughts on cadence for that segment?

Speaker 2

Carolina, we're seeing the sales come back. So remember, we had a we made a strategic move to reorient the sales force and we did that the back half of last year. We took our sales personnel, we focused them on in market retail separate from commercial, separate from retread, etcetera. That change and have conducting that change with a 100 plus sales reps, it did not deliver the gains as fast as I would have expected. And in fact, in some instances, it took us a little bit backwards.

Speaker 2

Longer term, I think those are the right causes to have focused sales organization based on end market. The market was also down 8% to 10% in our space of wheel weights, tire valves, tire pressure sensors. We also, Carolina, in the midst of changing out the sales force, we raised price and tested our value proposition, probably got a little aggressive on price. What we're doing now is we're going back and addressing all of that. We're gaining back business sometimes at a lower price.

Speaker 2

Our salespeople are now getting more traction. And ultimately, I don't see the end market itself recovering until 2025. That is part of why we changed our guidance. But I also see that Myers Tire Supply, it has a great brand. It's got a great brand and a great ability to service.

Speaker 2

What we're seeing is we're coming back and gaining share and I'd expect that to happen over the next year. So that's hopefully that answers your question.

Speaker 5

Great. Yes. Thanks so much.

Speaker 2

Thank you. Thanks, Carolina. Thanks, Carolina.

Operator

Thank you. We have our next question from William Bisson from Tieton Capital Management.

Speaker 6

Thank you. Two questions. First of all,

Speaker 4

in the

Speaker 6

going from $10,000,000 to $25,000,000 to $40,000,000 capping in rather evenly over the quarters of this year and next year? Or does it end up being pretty lumpy depending on how order shipments go? Walk us through the dynamics of that revenue ramp, if you would, please?

Speaker 2

Yes, Bill. Good to hear from you. So on that business, what we've seen is that the contracts that we get approved for come in chunks of $10,000,000 to $15,000,000 chunks. And what's changed since 2023 is we now have 3 of those chunks, if I'll call them that. And so the revenue numbers of 25% this year and directionally 40% next year, I feel good about those numbers.

Speaker 2

The lumpiness bill is when a contract is approved and we actually go to production with aerospace or with military, these things just always take longer than you expect. And so the ramp of those can be a little bit lumpy. Once that contract is in place, once we're producing the product, we're running 20 fourseven. And once each contract is approved, then it's pretty even. Directionally, the military sales, so there's a tremendous amount of restocking worldwide because of these conflicts.

Speaker 2

And I think that over the next 5 to 10 years this business is going to be a good growth tailwind for Meyers. Is $40,000,000 the end? I don't believe it is. I don't know exactly what the end could be. I know there's a lot of good growth runway, but the start up bill will be a little lumpy.

Speaker 2

As we mentioned in Q1, we actually there was a bit of delay on getting some labeling approved and getting some packaging approved. Now that's been resolved and that production line is going 20 fourseven and we're seeing the results of it. So I'd say on the start up bill, a little bit lumpy. But directionally, if you look at this over the next 3, 5, 7, 10 years, the trajectory that Grant had in his slide is correct.

Speaker 6

That's very helpful. Thank you. And you said you now have 3 contracts. And I think in the opening remarks, there was a reference to additional contracts that you thought were possible. Could you talk to those and how significant they could be?

Speaker 2

Yes. Directionally, the same bucket, as I said, dollars 10,000,000 to $15,000,000 top line per contract. I can't go get too much in the specifics because we're dealing with specific countries in their militaries and their sourcing. But you would stand to believe that some of this is in Europe, some of the countries that have publicly said they're restocking their artilleries, some of those that are a little bit more concerned about some of the instability and potential conflict there. So again, we've got good positions in Eastern Europe as well as in Western Europe, and we're negotiating with some of those militaries on this artillery packaging.

Speaker 6

Great. Thank you. I appreciate that. And then shifting to Signature, if we could, please. Longer term, there is this movement to convert from wood maps to composites.

Speaker 6

Did you have in the quarter or this year any meaningful or material kind of tangible evidence of that shift or transition taking place? Or is this literally just one small piece of business at a time?

Speaker 2

Direction, so remember, let's say 80% to 90% of the installed base is a wood product, 10% to 15% is a composite product in the United in the U. S. In Western Europe, the installed base is that aluminum product, to the same extent, 80%, 90% and then 10% or 20% is a composite product. It's very similar to what we see with our Buckhorn product, and even quite frankly similar to what we see with our Aqua Mills product. Is over the course of several years or really even decades that the plastic composite particularly if it's sustainable and recyclable, continues to gain share from the primary substrate, which again is is cardboard in the case of Buckhorn and Acro Mills and it's wood in the case of of Signature.

Speaker 2

The drive and the conversions that we're having and the growth there over the last 5 years at Signature and what we're forecasting for the next 5 years is, yes, you've got $1,000,000,000,000 of infrastructure spending through the 2 acts that Grant cited in his slide. That's a big lift. The other piece is just the conversion. And again, if you can move your conversion of composites from 10% to 15% or 20%, you're basically doubling the available market. On the tip of my tongue, I don't specifically know those numbers.

Speaker 2

I'd have to go back and relook at what we disclosed at Investor Day. But that is a part of the Investor Day materials under Jeff Condino's presentation for anyone to reference.

Speaker 6

Great. Thank you. And Mike, I'm actually going to take off on one of your comments relative to ACRO Mills and the replacing cardboard with the composite. What proportion of that business is cardboard or that industry is cardboard? So just really trying to get my mind wrapped around how far along in the transition from cardboard to composites those bins are?

Speaker 2

Yes. The way I look at it is we've consistently talked about The bigger driver there would be in Buckhorn and Signature. On Aqua Mills itself, if you think about the Kanban bins and organizational bins in industrial settings, at restaurants, in medical, at nurses' stations as an example, supply stations. I would be over my skis bill if I tried to talk about how much is cardboard versus plastic. But directionally, the key thing to know is that Acro Mills, and there's one other competitor, Acro Mills product, based upon how we manufacture it and the raw materials we use is a little bit more durable, a little bit more heavy duty, typically priced a little bit higher.

Speaker 2

And it does have a brand known for the highest quality. The specific conversion rates, again, GDP to 2x GDP, but it's not going to be a conversion rate of 15% 10% or 15% like what we expect with Signature.

Operator

Thank you. We currently have no any questions. Thank you.

Speaker 3

Just while we're waiting to see if there's any other questions, Caroline, I had said one item about the cash conversion. I had used the term percentage. I was actually referring to days. We typically have about a 60 day cash conversion cycle when we look at our days sales outstanding plus days on hand less our days payable outstanding. So just to clarify that.

Speaker 1

All right. Well, thanks, Kenneth. And thank you all for joining Myers Industries' 2nd quarter earnings call. We invite you to follow-up with additional questions or meeting requests. To schedule 10, just please contact me, Megan Behringer, using the information found on Slide 26.

Speaker 1

Thank you for joining and have a great

Operator

day. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
OP Bancorp Q2 2024
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