Myers Industries Inc (MYE) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Myers Industries second quarter fiscal 2006 earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host, Mr. Max Barton. Thank you, Mr. Barton. You may begin.

Good afternoon, everyone, and welcome to the Myers Industries call to review the second quarter 2006 financial results and business performance. With me today are John Orr, President and Chief Executive Officer, and Don Merril, Vice President and Chief Financial Officer. This morning we issued a news release which details the financial results for both the second quarter and first half of the year. If you have not received a copy you may access it from our Web site at myersindustries.com. It's at the bottom of the home page. This call is also being carried as an audio Web cast from our site and it will be archived there along with a transcript within 24 hours. Before I turn the call over to management, I would like to remind you that we may make forward-looking statements during the course of this call. These comments are made pursuant to the Safe Harbor provisions in the Securities and Litigation Act of 1995. Such statements involve risks and uncertainties which may cause results to differ materially from those set forth in these statements. Among other things, the risks include various economic conditions that influence the Company's market, the development, introduction and customer acceptance of new products, competitive products and pricing, reliance on key customer relationships, dependence on foreign suppliers, supply and manufacturing constraints, fluctuation and raw material prices and other risks and uncertainties detailed from time to time in the Company's SEC filings. Following management's remarks there will be a brief answer and question session with the investment community. I am now pleased to introduce John Orr, President and Chief Executive Officer.

Thank you, Max. And good afternoon, everyone, it's a pleasure to have you with us. I'm pleased to report to you that the Company achieved very successful operating performance in the second quarter and first half of this year. During the second quarter, we had the highest revenues ever for the Company's second quarter, 238.2 million. However, due to the impact of a goodwill impairment charge of 109.8 million which is related to strategic actions we are taking to profitably grow the business for the long term, the Company reported a second quarter net loss of $100 million a net loss per diluted share of $2.85. Excluding the charge, the second quarter of 2006 surpassed 2005 results with record second quarter net income of 9.8 million an increase of 92% and net income per diluted share of $0.28, an increase of 87%.

So, from an operating perspective, I characterize our performance through the second quarter as outstanding. As we said in the news release, and I want to reiterate the point very clearly to all of the investment community, Myers Industries' operating and business fundamentals are as strong as ever. Our continued focus on strategic customers and markets, pricing adjustments to manage raw material costs, productivity improvements and cost control is paying off with excellent results. We are on track with a key elements of our strategic business evolution plan, which we clearly presented in our 2005 year-end conference call and in subsequent communications.

Part of that plan included potential divestitures and strategic acquisitions. We said that we might be getting a little smaller in order to grow larger and more profitable. With our announcement this morning of the intent to divest the businesses of the European material handling segment, and to focus resources and investments in our key business segments, we are executing on a most critical part of our strategic plan. Necessary part to build a better business per shareholders, customers and employees. The effects of the goodwill impairment charge related to our strategic actions should not detract from the Company's strong fundamentals, demonstrated through the second quarter.

During the second quarter, the Company's performance was solid across its key business segments. As you recall, we finished 2005 with a record third quarter. Record sales and our highest earnings in six years in the fourth quarter and we started 2006 with all-time quarterly records for sales and income in the first quarter. The momentum we have now is critical as we continue our strategic initiatives to strengthen our core businesses and to deliver sustainable profitable growth. Now, to review the second quarter and six month consolidated financial results and business segment results for you, I'd like to turn the call over to Don Merril, our Chief Financial Officer. Don?

Thanks, John. And I just want to echo your assertion that the operating performance in the second quarter and first part of 2006 is outstanding. Despite the goodwill impairment charge, our performance clearly shows that we are executing our business strategy and positioning the Company to capitalize on the benefits of divesting nonstrategic businesses and reinvesting in our core businesses.

Now, onto the second quarter and year to date. And so I don't have to say it each time, these results are compared to the second quarter and first half of 2005. For the second quarter of 2006, net sales were a record 238.2 million, an increase of 6% from 225 million. The Company reported a second quarter net loss of 100 million which included a goodwill impairment charge of 109.8 million. Excluding the charge, net income increased 92% to 9.8 million in the second quarter of 2006, a second quarter record, compared to net income of 5.1 million in the second quarter of 2005.

Net loss per diluted share including the goodwill impairment charge was $2.85 for the second quarter of 2006. Excluding the charge, net income per diluted share increased 87% to $0.28 in the second quarter of 2006 compared to net income per diluted share of $0.15 in the second quarter of 2005. For the first six months of 2006, net sales were a record 483.1 million, an increase of 5% from 461.2 million last year. With the impact of the goodwill impairment charge net loss for the 6 months would be 89.2 million compared to net income of 13 million the first half of 2005. Excluding the charge net income increased 60% to 20.6 million in the first half of 2006 versus 2005. Net loss per diluted share including the goodwill impairment charge was $2.54 for the first half of the 2006. Excluding the charge net income per diluted share increased 60% to $0.59 in the first half of 2006, compared to net income per diluted share of $0.37 for the first half of 2005.

I'm very pleased to report that the Company achieved much stronger gross margins for the second quarter in the six months. Gross margin in the second quarter of 2006 increased to 30.4% of net sales from 26.1% in the second quarter last year. For the six-month period, gross margin improved to 29.3% of net sales compared to 26.6% for the same period last year. As indicated in the news release, this improvement is a result of a strict focus on strategic pricing adjustment and continued productivity gains to help offset raw material inflation and make our operations more efficient.

The prices for plastic raw materials, mainly high density polyethylene and polypropylene, were approximately 10% higher on average in the second quarter of 2006 compared to the second quarter of 2005. In the first six months of the year, raw materials averaged 6% higher compared to last year. Selling and administrative expenses for the second quarter of 2006 increased as a percent of sales to 22.6% from 21.2% in 2005. For the six-month period selling and administrative expenses increased as a percent of sales to 21.4% from 20.9% in 2005. This increase reflects possible streamlining and simplifying our corporate infrastructure to ensure that it's the right size to support our business. We will also experience some of this in the third quarter as we review our business segments to identify other areas of potential organizational changes and permanent cost reductions. Also factored in here is increased selling expenses related to freight.

Now let's turn our attention to our business segments and their performance. This is detailed in the press release and, again, the figures for second quarter and first half of 2006 are are all compared to the same period of 2005. In our distribution segment net sales were 50.1 million in the second quarter, an increase of 2%. For the six months sales in the segment were 96.6 million an increase of 6%. Income before taxes in the distribution segment increased 4% to 5.5 million in the second quarter for the six months income before taxes increased 14% to 10.3 million.

The key performance factors and distribution for the second quarter included a favorable product mix, continued purchasing and pricing management across product lines, productivity initiatives within the enterprise and strict attention to controllable costs. As we have indicated before, distribution is a highly strategic business for us. Since being appointed Managing Director of this segment in 2005, Dave Grider and his team are doing an excellent job of streamlining and positioning the business for the future. With an industry-leading brand, deep customer relationships and unrivaled capabilities, this segment provides a solid foundation for continued growth.

In our North American material handling segment, net sales in the second quarter in 2006 were 60 million, an increase of 25%. For the six months net sales were 122.1 million an increase of 15%. Income before taxes for Material Handling -- North America was 8.4 million in the second quarter, an increase of 664%. For the first half of the year, income before taxes was 16.9 million, an increase of 177%. The key performance factors in the North American material handling segment for the second quarter include: strategic pricing management across the segments; markets, also the segment benefited from a favorable product mix of bulk containers and reusable container systems which delivered growth with key customers and new business opportunities across several markets. Our Akro-Mils Mills and Buckhorn brands which comprise North American material handling excel at providing customers with did most innovative reusable packaging materials for the transport, handling and storage of their products. Our managing director, Don Thomas, and his team, have done an exceptional job growing the business through strategic pricing to recover raw material costs, building our brand strength, as well as identifying and developing new customers and application opportunities for our diverse product line.

In our European materials handling segment, net sales continued their downward trend since the third quarter of 2005. Second quarter net sales this year were down 2% to 44.1 million as compared 45 million in the second quarter of 2005. For the first half of 2006, net sales were down 7% to 83.3 million as compared to 89.4 million in the first six months of 2005. Loss before taxes in this segment was 106.9 million in the second quarter 2006, which obviously includes the goodwill impairment charge. as compared to the income before taxes of 2.8 million in the second quarter last year. Excluding the charge, income before taxes increased 4% to 2.9 million in the second quarter of 2006.

For the six months ended June 30th, 2006, loss before taxes including the charge was 106.1 million, compared to income before taxes of 3.6 million for the same period last year. Excluding the charge, income before taxes increased 3%, to 3.7 million compared to the first half of 2005. The key factors influencing operating performance in the European segment during the second quarter and six months were: lower sales volumes due to soft markets, pricing adjustments to offset higher material costs through the first half of the year, and reduction in operating expenses due to an increased focus on cost control in both the quarter and year-to-date.

Under managing director Mohsen Eskandar, the new European management team rallying performance to improve sales and profitability has been against difficult markets and competitive pressures. With our announcement today Meyers Industries has decided that continuing in Europe is not advantageous for the Company's strategic development. We anticipate that in the third quarter, this segment will be reported as discontinued operations.

In our Automotive and Customs segment net sales were 52.8 million an increase of 6%. This reflects steady demand across several of the segments markets and continued gains with strategic pricing initiatives. For the six-month period sales in the segment to 104.7 million,an increase of 7%. Income before taxes was 4.7 million in the second quarter of 2006, an increase of 42%. Continued success with selling price adjustments was the primary factor influencing profitability in the segment during the quarter. For the six months income before taxes was 8.6 million, an increase of 32% from the prior year.

I want to say here that the profitability improvement of this segment since the last year is a great testament to the commitment our people have the quality, customer satisfaction, improving productivity, and to the leadership of Managing Director Dennis Roberts. We continue to review this segment to identify opportunities with niche markets and internal synergies and to maintain our resource focus on the areas with most potential to deliver even stronger more profitable growth.

Our Lawn and Garden segment turned in solid performance in the first half of the year, despite weather conditions in the South and Midwest that dampened demand from our grower customers. While net sales were 36.8 million in the second quarter and 88.3 million for the six months, decreasing 7% and 2% respectively from last year, this segment was able to hold on to its profitability gains compared to last year. Income before taxes was 2 million in the second quarter of 2006, flat compared to last year's second quarter and 8.9 million for the six-month period, a slight increase of 1%. Lawn and garden Managing Director Michael Lefroy's brand teams are to be congratulated for weathering a lackluster growing season in the first half of the year. We will continue to build on the brand strength, innovation, and customer loyalty that boost our position as industry leader in horticulture and packaging products.

Now, turning our attention back to the corporate level, we continued to make good progress on debt reduction in the second quarter and first half. Total debt at June 30th, 2006, was 236 million, a reduction of 16.8 million from the 252.8 million at December 31st, 2005. Capital expenditures for the first half of the year totaled 7.1 million. This is lower than the 10.5 million we had spent the same time last year but should not be construed any way as a lack of investment in our operations. Given the divestiture actions and weighing potential investment opportunities, we are vigorously analyzing our strategic needs and resources at every level of the business. As such, the Company now expects capital expenditures to be in the range of 20 million to 25 million for the year revised from the 25 million to 30 million range previously provided. I'll now turn it back over to John to provide an overview of our strategic business evolution as it relates to the intended divestiture of our European businesses. John?

Thanks, Don. Clearly it was a strong quarter for our operating performance. We said at the end of 2005 that we would be looking at opportunistic divestitures to improve our growth potentials. Our actions with Europe are doing just that, with the intention of putting us in a better position to redeploy assets in our core business segments, to fuel sustainable profitable growth.

That being said, each of the operations and the talented people employed by them provide great potential for new ownership whose focus is on their particular capabilities, markets and geographies. With the intended divestiture of the European business, we expect to use the proceeds to reinvest in our key business segments and to reduce debt. We will be announcing more details as this part of our strategic business evolution unfolds. In conclusion, our profitability over the last year has been benefited from ongoing initiative's with pricing adjustments, focus on strategic customers and markets, strict cost controls, programs in lean manufacturing and value-based engineering to improve productivity, quality and customer satisfaction, and streamlining to right size the business. The Company expects to realize further contributions to sales efficiency and profitability from these initiatives, as well as the strategic actions to reinvest in our businesses.

Lastly, I want to announce that the Board of Directors earlier today approved a 5% increase to the regular quarterly dividend of $0.05 payable October 2, 2006 to shareholders of record on September 8th, 2006. The Board believes it is important to continue our dividend payment and approved the dividend to be paid out of surplus capital. We should see a news release to that effect this afternoon. Now I'll turn it over to Max.

With that, we'll turn it back to the operator who will direct our Q&A phase. Please indicate to her when you want to ask a question and Claudia, go ahead.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Chris Manuel with KeyBanc Capital markets. Please proceed with your question.

Good afternoon, gentlemen.

Chris, how are you?

Good. Congratulation on a great quarter.

Thank you, congratulations to you on being analyst of the year for packaging.

Thank you very much. A couple questions for you. First, could we, you talked about selling now the European business. And any sort of maybe guesses as to what you anticipate with respect to proceeds? And then, if we could talk a little bit about other areas where you would be willing to redeploy assets? I think in the past you've discussed looking to grow and certainly on this earlier in the call you discussed this distribution business being highly strategic. Are there any other areas where you would like to grow the business to redeploy money?

Yeah. I can -- Chris, this is Don. I can answer the first part of that. We really don't want to get into expected proceeds on this sale. So, we really can't get into that.

Chris, we will tell you that as far as the growth goes, we like to continue to talk about the remaining segments that we have and starting again with the distribution business, it's a very good business for us. It does throw off a lot of cash. We see that as a great opportunity to grow potentially with the bolt on type acquisitions for that segment.

The second segment being Lawn and Garden, that is certainly also is a growth opportunity for us. The potential is there for strategic type acquisition to add to that segment. And then certainly Material Handling -- North America is also a targeted growth segment for us. We would certainly look at some type of bolt-on acquisitions there to help us grow that market share and profitability. So, and I guess really even Automotive and Custom, if the right opportunity came along, we certainly will take a look at that segment as well. That kind of gives you an idea of what we're thinking about as we go forward.

Okay. And the next question goes along the lines if we could maybe get a also bit into volumes and how those look. It looked like your material handling business was up very, very sharply. I think you're up about 25% or so there. Was that -- in your prepared remarks I think you talked about strategic pricing and things of that nature. Was volume favorable there? Could we take a look at the lines to get a sense of volume being up/down year-over-year?

I'm going to let Don handle that.

You're right. Volumes in the second quarter, material hamming are up 25% and the breakdown of that growth is roughly 60% pricing, 40% volume.

Okay. In the Lawn and Garden piece you talked about how earlier in the year, that, well, through the the quarter, it was pretty wet here and truncated some growing seasons. Do you think it would be made up through the back half of the year?

We saw a little bit of that pick up in the last month of the quarter. You know, generally we get a rebuy, what they call a rebuy in the industry, we didn't see near as strong as we did last year. But we did see some.

As we look forward, you know, the new growing season really, especially out on the west coast, starts in several months and I think we still are pretty bullish and pretty comfortable that the season looks good. Obviously if there's a major hurricane or something like that down in the Texas area, the South, that always retards growth like it did in Florida last year. But obviously we can't predict that. But we're still feeling fairly comfortable.

Okay, very good. Last question is, without trying to pin you down to give specific guidance numbers or nick have things of that nature, would there be any reason to believe that with all of the work that you guys are doing, particularly with a lot better pricing and volumes appearing pretty good, that you shouldn't be able to exceed your on a year-over-year basis, do better the last two quarters than what you did last year?

You know, we don't give guidance and I think that our performance in Q1 and Q2 of substantially beating the quarters from the previous year, I think that, you know, we're going to continue to have strong performance in Q3 and Q4.

Very good. Thank you, gentlemen.

Yep. Thanks.

Our next question is coming from David Leibowitz with Burnham.

Good afternoon. I'm following up on that last question slightly differently. Did the results of the second quarter in particular operationally exceed your expectations?

Yeah, a little bit. I think we were obviously we were a little concerned every morning we woke up and it was raining, David and I thought, my God, what's going to happen to the horticultural business. But yeah, I think we were very pleasantly, I won't say surprised because we keep a pretty close handle on what's going on, but we certainly were pleased with our results. And I just, I've got to say like we said during the Fall here, we're just very, very pleased with all of the teams out there and the job that they've been doing for their customers. It's just really a spectacular effort and we expect to continue.

Second question, in terms, I have two questions on the restructuring. First question, could you tell us roughly what the revenue stream that will be eliminated amounts to?

I think Don can handle that.

Yeah. We are estimating this year's revenue stream to be about $160 million.

Okay. And that's your estimate of what it would have been? Can you tell us what it was -- I'm sorry?

That's a full year estimate.

Okay. And the second question in this regard, can you give us some idea of what the recast balance sheet will look like once this business is off the books completely?

We really can't do that at this time.

Okay. Can you tell us what it was carried on the books at?

No, we really rather not get into that right now.

Okay. And your statement that at the end of the third quarter it will be reported as a discontinued operation, are are we to take that to mean actual transaction will close sometime either way third quarter or early the fourth quarter?

We're going to try to get the transaction done as quickly as possible. However, we are treating this from an accounting standpoint as a discontinued operation in the third quarter.

Okay is Allibert part of what is being sold European Allibert?

It's Allibert and Raaco.

Oh, it is both.

Yes.[voices overlapping]

Now Allibert had a U.S. arm, didn't it?

The U.S. arm, some years ago was transferred to North America. It's --

Part of Buckhorn?

Yes. It's a plant that belongs to Buckhorn.

So that will not change.

Right.

Okay. And in terms of the distribution business, we have somebody new coming onstream to run it. Can you share with us whatever strategies may have been evolved for this going forward?

Well, actually, that was a year ago that we named Dave Grider as the Managing Director, and Dave had spent most of his career on the manufacturing side. So distribution was somewhat new. I think that was probably good because Dave tends to ask a lot of questions, and demand answers and I think just in his learning the distribution business he turned over a few rocks that probably needed to be turned over. You know, certainly what we're looking at there is cost. Because in our distribution business, that's certainly one of the key issues. They've worked hard to close a few branches that were not profitable and to put that business into other, more profitable branches and cover it. We're continuing to work on technology in that business. As we all know, the customers there really demand service. If they order something, they'd like to have it that day or no later than the next day and that demands highly technical system which we're in the throes are putting in. So those are the types of things that Dave and his team have taken on. And I kind of liken it to shaking off the fleas a little bit in that business.

And the last question then I'll get back in queue and let others ask, the core business as it would exist Xing the 150 million, are we supposed to look at the growth achieved in the first half, take some number apply to it the second quarter say that is what the core business would be less the 150 million of top line? Or are there other components that we should take into account?

I think that's a fair characterization of where the growth will be.

Thank you.

We said we may get a little bit smaller before we got larger.

Understood. So let me say thank and you I'll get back in queue.

Thank you, David.

Once again, if would you like to ask a question, please press star 1 on your telephone keypad at this time. gentlemen, I'm showing there are no further questions at this time. Do you have any closing comments?

If there's nothing else from anybody online, we thank you for your time. There will be a transcript of the call posted to the Web site I believe within 24 hours and a replay is available via Web cast there, and by telephone as well. You may look at your news release for access numbers. And thank you all very much. Have a pleasant afternoon.

Thank you. This does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.