Myers Industries Inc (MYE) 2011 Q1 法說會逐字稿

Greetings and welcome to the Myers Industries 2011 first-quarter earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pressure to introduce your host, Monica Vinay, Director of Investor Relations for Myers. Ms. Vinay, you may begin.

Thank you. Good morning and welcome to Myers Industries 2011 first-quarter business performance review. I am Monica Vinay, the new Director of Investor Relations at Myers Industries. In my previous role at Myers, I was the Finance and IT Director of the Distribution segment. I am looking forward to working with you.

Joining me today are John Orr, President and Chief Executive Officer; David Knowles, Executive Vice President and Chief Operator Officer; and Don Merril, Senior Vice President and Chief Financial Officer.

Earlier this morning we issued a news release outlining the financial results for the first quarter of 2011. If you have not yet received a copy of the release, you can access it on our website at myersinc.com, under the investor relations tab. This call is also being audio webcast on our site and will be archived there along with a transcript of the call shortly after the event.

Before I turn the call over to management for remarks, I would like to remind you that we may make some forward-looking statements during the course of this call. These comments are made pursuant to the Safe Harbor Provisions of the Securities Reform Act of 1995. Such statements involve risks and uncertainties which may cause results to differ materially from those set forth in these statements. These risks and uncertainties are detailed in the Company's SEC filings and may be found in the Company's 10-K filing.

Following management's remarks, there will be a brief question-and-answer session with the investment community. I am now pleased to turn the call over to John Orr, President and Chief Executive Officer. John?

Thank you, Monica, and good morning. It's a pleasure to have you with us. We are happy to have Monica utilize her experience and talents in the important position of Director of Investor Relations.

I am pleased with our results in the first quarter of 2011 as we experienced continued recovery in the Lawn and Garden segment and made additional progress in the rest of our businesses. Net sales for the first quarter were $193.4 million compared to $186.4 million in the first quarter of 2010, an increase of 4%. Net income was $6.7 million or $0.19 per share in the first quarter compared to $5.5 million or $0.16 per share in the first quarter of last year, a 22% improvement.

Our results demonstrate that we continue to transform the Company through our focus on our five strategic principles, namely customer dedication, innovation, operations excellence, organization development, and financial strength. As we review the segments, you will see that the value-add parts of our business are improving, resulting in increased customer service, improved profitability, and stronger cash metrics.

Now I would like to turn the call over to our Chief Operating Officer, David Knowles, to review the performance of each of our business segments. David?

Thank you, John. I believe that our first-quarter results show two things. Our businesses performed better and we demonstrated our ability to execute our performance improvement plans in a difficult environment. While we still have substantial improvement yet to make, we are definitely making progress.

Let me take a couple minutes to review segment results in the first quarter. The Material Handling segment generated strong sales due to increased capital purchases by customers in line with the Material Handling or the MATM Economic Index. Dedicated resources applied to strategic markets and strong demand in our agricultural segment.

Net sales in the first quarter increased by 9% compared to the first quarter of last year. Importantly, our mix was more profitable with less lower margin palette sales.

Through our focus on operations excellence, Material Handling was able to more than offset an 8% quarter-over-quarter price increase in polyethylene. As a result, margins substantially improved as compared to last year.

Material Handling also continues to focus on innovation, introducing four of the 10 new products and services launched across Myers Industries in the first quarter. This amounts to about 5% of our first quarter Material Handling sales from our growth initiative that we kicked off in 2009.

On March 30, 2011, Buckhorn announced in a press release that it introduced the Maximizer, a reusable plastic container that serves as a unique alternative for corrugated bulk containers. The introduction, which was made at the ProMat Material Handling Show held in March, was received enthusiastically by attendees and the media. Our outlook for Material Handling remains positive but is tempered by our concern that higher resin prices could lessen the drive to substitute plastic returnables for more traditional materials such as wood and cardboard.

Distribution segment sales were up 7% and tracked ahead of the replacement tire sales and gasoline sales indexes that we compare ourselves to in that business. In addition to our strategic initiatives, focus in the segment continues to be centered on three main objectives -- implementing project enterprise, our dissertation model change; growing the Fleet segment by expanding our product and service offering; and expanding and growing our international business in Canada and Central America.

As energy prices continue to rise driving gasoline prices upward, we have taken a more cautious approach to the Distribution business. Our plan to consolidate branches, improve service, and reduce costs and working capital will remain the focus and will allow us to better weather a potentially softer market.

Our Engineered Products segment delivered strong sales results in the first quarter mostly as the result of a continued rebound in the RV market. Recreational vehicle sales in America increased by 28% compared to last year.

In 2010, we acquired Enviro-Fill. We are excited about the launch of the Enviro-Fill product line in the second quarter. Combined with our new low permeation marine fuel tanks that recently received a certificate of conformity from the Environmental Protection Agency, this makes us the industry's only turnkey provider offering an integrated EPA-compliant fuel tank and overfill prevention system.

Finally, progress continued in our Lawn and Garden segment. In our last call, we outlined the plan for our Lawn and Garden business to restore consistent and predictable profitability. We said that we expected the process to rollout over a couple of seasons. Now that we have nearly completed the first season of this plan, we feel that we can confidently say that our plan is moving forward according to our expectations.

We continued to optimize the service improvements made during 2010 although we recognize that we still have more work to do in this area. We have implemented a new management process that has reduced the risk of volatile raw material costs. I'm sure you will recall that in Q2 of 2010 a spike in resin costs had a large negative impact on our profitability.

In first quarter of 2011, we experienced a larger cost spike in our primary resin and managed to effectively pass it through to the market. We have accomplished this by shortening our quote to produce cycle and by working through difficult but professional pricing discussions with our customers.

We met our first-quarter targets for substituting recycled and alternative materials for prime resin and are confident that we will meet or exceed full-year targets.

We've realized productivity gains which will dampen the effects of rising costs and reduce the impact to our customers as a step in the process for continuous year-over-year productivity improvement. And we've introduced our line of low-cost decorative pots, which is a first small step toward a revitalized new product development process.

In the last conference call we also said that we expected that growers were taking a conservative approach to the 2011 season with expectations that they would increase their production if the season appeared strong. We have been somewhat disappointed in this regard as the late spring has produced a softer market. As a result, sales declined from the prior year by 6% but operating margins continue to show gradual sequential improvement despite the raw material spike.

Overall for Myers, we feel good about the solid progress made in the first quarter. That said, we are concerned about some current headwinds. Sustained gasoline prices will impact our business, but our Distribution and Engineered Products businesses may be more acutely impacted. For example, the high prices are already having a dampening effect on our RV business at Ameri-Kart.

Since it appears that high-end volatile resin costs are a feature of our business for the future, our management teams continue to improve our ability to pass cost changes to the market. We will continue to pursue ways to address this challenge.

We are concerned about the market impact of high material costs, so we continue building strategies to expand our raw material alternatives.

As we execute plans to address these headwinds, our operations leaders continue to focus on driving our strategic objectives. This includes demonstrating our customer dedication through service improvements and launching our first innovation workshop focused on capturing and quantifying the voice of our customers. Driving safety productivity improvement and material cost reductions to exceed our productivity targets and our operations excellence initiative. For example, we just graduated another 21 lean green belts taking our total number of graduates to 43.

Our focus also includes taking the next step in our organization development initiative by deepening our engineering, R&D and marketing benches and continuing to increase our business' ability to reach their potential and demonstrate the real financial strength of Myers. John?

Thanks, David. I will now turn the call over to Don Merril, our Chief Financial Officer. Don will review the first-quarter financial results by business segment as well as some other key financial metrics. Don?

Thanks, John. The first-quarter results compared to the same period last year were as follows. As John stated earlier, net sales for the quarter were $193.4 million, an increase of 4% compared with $186.4 million last year. net income was $6.7 million or $0.19 per share as compared to $5.5 million or $0.16 per share in 2010 despite the raw material increases discussed at length during the call.

Gross profit was 26.9% in the first quarter of 2011 compared to 24.1% in the first quarter of 2010. This improvement is the result of increased sales, productivity initiatives, and the favorable product mix particularly in our Material Handling segment.

Selling, general, and administrative expenses were $39.7 million, an increase of $5.2 million compared to the first quarter of last year. The increase is due mostly to higher variable selling expenses of which $1.9 million was freight related. $1.4 million was a bad debt accrual related to one specific customer, an impairment charge on a building for sale of $300,000 compared to a gain on the sale of a building in 2010 of $700,000 for a net unfavorable variant of $1 million.

Cash from operations was a use of $200,000 in the first quarter of 2011. This compares to a use of cash from operations of $9.5 million in the first quarter of 2010 which is more typical of our business in the first quarter of the year.

I would now like to turn your attention to our business segments and their performance. The results for the first quarter are compared to the same period of 2010. I will be referencing the adjusted pretax income or loss information as it appears in the reconciliation of non-GAAP financial measures located at the end the news release.

In our Material Handling segment, sales in the quarter were $65.7 million compared to $60.2 million last year. The 9% year-over-year increase was driven by strong sales in almost all product segments, led mostly by agriculture and increased capital purchases in our industrial customers. Again, if you exclude the less profitable palette sales in 2010, the year-over-year increase would be considerably larger.

Adjusted pretax income in the quarter was $10.3 million as compared to $5.1 million last year, an increase of 102% due mostly to increased sales, favorable mix of legacy products replacing lower margin custom palettes, and savings from our operations excellence program.

In our Distribution segment, sales were $41.6 million, an increase of 7% compared to $38.7 million in the first quarter of last year. The increase is due to strong organic growth and new product sales, especially higher pressure monitoring systems.

Adjusted pretax income was $3.3 million for the quarter compared to $2.9 million last year, an increase of 14% due to increased sales and increased gross margins.

In our Engineered Products segment, sales in the quarter were $27.9 million compared to $24.4 million in the same quarter last year. The increase of 14% was led mostly by a higher demand for our custom products in the RV and marine markets.

Adjusted pretax income was $2.9 million as compared to $2.8 million in the same quarter last year. Higher raw material costs partially offset the increased sales volume.

In our Lawn and Garden segment, sales in the quarter were $65.1 million, down 6% as compared to $69.5 million in the first quarter of last year partially as a result of growers taking a conservative approach to the 2011 season and the late spring, as David mentioned. The segment's adjusted pretax income was $3.9 million as compared to $4.9 million in 2010, which although down from the prior year continues to show gradual sequential improvement despite higher raw material costs in the segment.

That concludes the review of the financials. I will now turn the call back over to John. Thanks.

Thanks, Don. Our outlook for 2011 remains positive, but is tempered somewhat by the current rise in raw material costs. We will continue to focus on executing our performance plans to improve operating results across our businesses. We are committed to profitably growing the business through investments in high return projects.

That concludes management presentation, so I will turn it over to Monica so we can take your questions.

Thank you, John. The operator will now direct the Q&A phase of this presentation. Go ahead, please.

(Operator Instructions). Chris Manuel, KeyBanc Capital Markets.

Good morning, ladies and gentlemen. A couple -- congratulations on a terrific quarter and a great start to the year. A couple questions for you.

First, you went through a good bit of detail with pieces and parts that were doing well within the units, but could you help me a little bit with -- to get to what were the actual kind of volume levels or organic growth levels within the units and in particular in Material Handling, maybe help me separate what would have been the palette versus non-palette so I can kind of get a sense of what the base business -- or the legacy business had been doing?

Okay, I can tell you what the increases were organically by segment. The Distribution business -- this is stripping out price -- grew 6% year-over-year. Engineered Products grew 11%. Material Handling grew 20%, and our Lawn and Garden business declined by 10%.

Okay, and the Material Handling piece, was that inclusive of the palette piece down or is that the legacy piece?

That is adjusting for two things, actually. What I'm doing is adjusting for a lease that took place that we disclosed last year in the first quarter of 2010, which was about $8 million, and that flowed through by the end of the year. However, our first-quarter sales would've been increased by that. And the offset to that is we had $16 million worth of palette sales in the first quarter of 2010, which we did not have in the first quarter of 2011.

So if I adjust for that and some price, you can see that the Material Handling legacy business grew by 20%, which is a very, very strong quarter.

Okay, that is the legacy piece. That's helpful. As we think about -- David, I know one of the initiatives has been new products and as you pointed out, there were 10 or so new products launched. Can you give us a sense of what portion of revenue that might represent or is there a target that you are hoping to reach over a period of time or maybe a little color as to how that might progress?

I think that -- yes. And frankly, we do have targets that we are shooting at, though the process, the specific process that we're using initiated in 2009 is at the early stages, so we haven't kind of come out and made targets too public as we're getting this thing going.

But listen, I think Material Handling is a great representative of what we are looking at for the business. We sold in first quarter about 5% of Material Handling sales were from this new product service growth initiative that we launched back in 2009. I think that's a pretty good target for this year for the business.

Okay, that's helpful. Have you targeted new products across some of the other areas as well?

Yes, in fact we have kind of -- because of the variety of businesses that we have, we've expanded the concept to including new products, new services, and other kind of growth initiatives. So yes, it's across all of our businesses and we've got all of our businesses sort of logging in to the initiative to set targets and manage toward them.

Okay, and then I have a couple other questions but one more before I jump back in the queue and that's, John, as you think about looking across the different business, how would you characterize utilization levels across the different units? Are you at a point where you feel good about capacity? Do you think about maybe some further restructuring in some of the units? Do you think you need to add in some of the units, etc? Kind of (multiple speakers) with this phase of the recovery.

I got you. I'm going to let David take that question. He's right on top of the operations.

No problem, sorry.

I'd say, Chris, we certainly feel much better about where we are at with capacity. Of course the growth in Material Handling is using our capacity much more effectively in the first quarter this year than it was last year. If you look across our two big manufacturing businesses, I would say we feel pretty good about our level of capacity and our utilization rate during our busy season, the Lawn and Garden as we've experienced this growth in Material Handling.

And capacity addition in the future will largely be focused on projects, growth targets, and investments where we are trying to grow the value of the business.

Chris Manuel Okay. That's helpful. I have a few others but I will jump back in the queue.

Christopher Butler, Sidoti & Company.

Good morning, all. In just the previous conversation on capacity and where you stand, distribution was left out there and you had mentioned that there's a possibility of just scaling back a little bit on your presence for distribution. Is that somewhere where we could see some restructuring here down the road or is it just more of a fine-tuning you are looking at?

This is David. The distribution change we call Project Enterprise. Project Enterprise really is a restructuring project for distribution. Our plan there is to go from 34 branch locations down to four distribution center operations. The goal there is to increase the critical mass of our inventories so that we can get higher fill rates with our customers and higher on-time delivery with our customers.

The other opportunities in that process is we are going to take costs out and we're going to reduce overall working capital as we improve our service levels. I would say we are about 20% of the way through that process right now and all of the markers that we are looking at to judge the success of that project are looking pretty good so far.

Let me add to that from a restructuring standpoint on that. It's not as big as certainly the project that we've had in the past, but we would anticipate restructuring costs to be somewhat between $1 million and $1.5 million total, of which you can see on the last page of the press release we've experienced $200,000 of that already.

What kind of benefits are you looking at? What's the timeframe on capturing those?

We are looking at benefits in the neighborhood of twice the cost, right? So we looking at about $2.5 million to $3 million worth of benefits associated with that and we should be seeing those on a run rate basis by the end of 2012 as we work our way through that project.

We also looking for some working capital benefits out of that project.

Absolutely, so when I talk about the benefits, I'm talking about from an EBITDA standpoint. But if we look at cost of capital as well and add them to that, we should see more working capital being driven out of the business associated with that project.

Shifting gears to Material Handling, you had mentioned that you had a pretty good product mix in this quarter. Is this a situation where your volumes have rebounded to the point where you can focus on the better mix of products and we can expect that going forward, or is this just simply just due to timing we will see more of the palette sales here in the future which will help your topline but be a little bit less on the margin side?

I would say that we are not looking forward to real growth or impact from the palette side of the business as we go forward. We had I think three factors really drove the volume improvement in the first quarter. The first was of course the market. As customers sort of turned the spigot off on capital expenditures during the recession, they've started to turn it back on and we've participated in the favorable market in the first quarter.

If you look at the MHEM Index, we are expecting that to be up in the high single digits, low double digits this year. So that's driving our sales.

The other two things is a focus on key markets. We have improved our position in the IDC or the liquid bin market and we are also having a very good year in the agricultural market. I would say that's probably a better year than expected and I would just leave it at that, a very strong year in the agricultural market this year.

And on the Lawn and Garden side, the cautious purchasing habits, from your position do you think that that's going to mean that there are additional purchases later in the year or what are your thoughts there?

We usually look for kind of a rebuy or a second planting. And as I said in my remarks earlier, we knew that growers were going into this season more cautiously in the past. They were kind of hoping to replant more aggressively as they saw signs of strength, and I frankly think that this extended winter or late spring has put a real damper on that for this season, and I don't expect strong sales results, strong comparable sales results in the next several months.

We will see kind of how their point of view changes as we start heading into the next season and the second half of the year.

As you go through the process of renegotiating contracts on Lawn and Garden, do you have any sense on how that may shift the timing or the seasonality of purchases in the segment?

You know, I would say that there's only one shift that we have seen. We -- really it was more of a correction to our own internal process. We have really shortened the cycle from when we quote a project to when we get the product produced and ready to ship. That I think increased sales for us in the second half of last year because this time last year we were expended out and we were delivering products that we had quoted months before.

We have really shortened that cycle. We are much more on top of things on a month-to-month basis now and I don't see that as a shift going forward. Frankly I don't see the pricing really shifting the seasonality of the business either. The growers need to put their plants into their greenhouses in the first quarter to get them ready to get out by spring, and that really is sort of the growing season in the business.

I appreciate your time.

Mr. Farber, CL King.

Good morning. Great execution in the quarter. Just a couple of questions. Could you talk about market shares? Maybe it's difficult to get at, but do you have a sense -- is there any segments you call out where you think you are taking market share given all your new products?

I guess I'd answer it this way. In the Lawn and Garden market, we feel that we are probably pretty flat on market share. We've taken a fairly aggressive approach to getting prices passed through to the market. We've had some puts and takes as a result of that but all of our tools on our radar screen tells us that we are pretty flat in terms of our share of the market.

In Material Handling and in our Distribution business, we are growing a little faster than the indexes, which means that we are in some parts of the market taking some share and in other parts of the market maybe penetrating markets where plastic returnables hadn't penetrated as much before, so I would think of that as market share. It's just maybe again not in kind materials.

Great, and can you talk about also your gross margins in the quarter? How sustainable do you think they are going forward?

We can talk about operating margins, if that's all right. Our operating margins in the quarter were pretty strong in most of our businesses and I think that first quarter, Lawn and Garden first quarter tends to be pretty good quarter for us. So I would think on a full-year basis it would be certainly less than the 6% that we drove in Q1. Probably somewhere in the neighborhood of half of that on a full-year basis.

Our Material Handling business coming in at almost 16%, that's on the high end of historical operating margins for us. However, we are creeping towards that number. A lot of improvement in that business, so I would say on a full-year basis kind of a little bit below that but certainly in that middle teen number.

Engineered Products just continues to crank along at 10%, a little over 10%, and I would anticipate that on a full-year basis as well.

Then our Distribution business on an adjusted basis was 7.9%, call it 8%, and I think that's a pretty good number as we go forward, creeping towards 10%, which is a historical number for us.

All right, okay, great. And then can you also just remind us how much liquidity you have, how you think about CapEx and any guidance you can give on the tax rates?

Yes, CapEx we've said $20 million to $25 million. I think last call we said we would be maybe a little bit closer to $25 million. I think we are definitely at the higher end of the range at $25 million for the year. As David pointed out, a good 60% of our capital spending if not a little bit more is going towards new products and productivity as we really starts to push the ROICs up in the business. What was the second part of the question?

Liquidity. Just tell us how much available liquidity you have.

Liquidity, we've got a lot. I think you know that we closed on a $180 million revolver towards the end of last year. We have $35 million on top of that as well from a fixed perspective, so we have access to $215 million and we are probably into that about $90 million. So a lot of headroom there.

And our tax rate was 39.6% in the quarter. It's a little bit higher than last year as we are driving more of our income from higher taxing areas such as the US and less of our income from lower taxing authorities such as Canada.

And you think that's going to stay roughly at that range for the balance of the year?

You know, I do. I think in the future we will be able to grow our business outside the US, but right now the majority of our income is being derived in the United States.

Okay, great. Thanks again.

(Operator Instructions). Chris Manuel, KeyBanc Capital Markets.

Hello again. Just when you thought you got rid of me. A couple follow-up questions. One is you talked about kind of where the balance sheet was at. By my math, you are roughly one times levered looking back on a trailing 12 or close to that on a net basis. So with the balance sheet kind of where it is at -- I know I ask this question every quarter -- but kind of walk through what strategic thinking is for capital -- for use of the cash from here. Is it continuing to fund dividends, obviously? But what's the right leverage for the business? Where do you go from here?

Chris, this is John. You are right, you ask the question every quarter. We kind of give you the same answer, but basically, Chris, we've done -- every year we go over with management and the Board and a third-party investment counselor as to strategic opportunities for Myers Industries. We have consistently said that we wanted to continue to pay down debt during the last couple years of recession. We think that was prudent. We think it was prudent for our shareholders and of course we continue to return a dividend, a nice dividends to the shareholders.

As we go forward, we are going to continue to invest on organic growth, new product development. As you know, we've put a lot of money into Material Handling in the last year or so to create new technology processes that allow us to make new and exciting products for our customers.

With respects to outside organic growth, we continue to look at potential opportunities and when we find -- if we find the right opportunity that makes sense for the business, then we will move forward and take action. That's kind of where we're at.

Okay, any further thoughts to -- I know Material Handling, Lawn and Garden business, that's selling for about 6 times current year EBITDA and 5 times next year. Any thoughts to considering repurchase it yourself?

Again, as I said, we always review on a virtually a quarterly with our Board and investment advisers as to our strategy. We think that we probably have longer-term better use for that money, which will make longer-term shareholder return rather than an incremental increase in share price for a short period of time and then saddle the Company with a tremendous amount of debt.

So to be honest with you, at this point in time we are not looking at a share repurchase.

Okay, that's helpful. We like consistency. That's why I ask you the question each quarter.

Right, we are pretty consistent.

Okay, so another question for Mr. Merril. Can you run through -- there wasn't a cash flow statement or at least I didn't see in the release. could you run through a few of the -- we had a key number so we can kind of get a sense of what free cash flow is like through the quarter and then potentially update us on how 2011 free cash flow looked, op cash flow, etc.?

Sure, we had -- from an D&A standpoint, we had $8.7 million worth of depreciation and amortization and I would anticipate on a full-year basis that would be somewhere in the neighborhood of $35 million. We had capital spending in the quarter of about $2.5 million.

And we think talked about $25 million or so I think for the year.

Yes, it will be on the high end of our original $20 million to $25 million range.

Okay, and did you have an op cash flow number then for what 1Q was?

Yes, our operating cash flow number was a use of cash of $200,000. If you recall last year we used $9.5 million. In fact, this was probably the best quarter we've had from a cash perspective since 2007.

First quarter.

But that will -- as typical seasonality will reverse its way out as the year goes on?

Absolutely, right. And the reason I bring that up is typically the first quarter we are a user of cash because of the seasonality. However, this quarter we were virtually neutral and a lot of that cash coming out of our -- squeezing a little bit more out of working capital and the fact we made more than last quarter. But right now we were off to a pretty good year from a cash flow perspective.

Okay, that's helpful. Thanks much.

There are no further questions at this time. I would like to turn the floor back over to the Company.

Thank you. We thank all of you for your time and your questions today. As a reminder, a transcript of this call will be available on the Myers' website within approximately 24 hours. A replay will be immediately available via webcast or call. Details can be found on the Myers Industries website under the investor tab.

Thank you all again.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.