Myers Industries Inc (MYE) 2011 Q2 法說會逐字稿

Greetings, and welcome to the Myers Industries 2011 second-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

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

Thank you. Good morning and welcome to the Myers Industries 2011 second-quarter business performance review. I am Monica Vinay, the Director of Investor Relations at Myers Industries.

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

Before I turn the call over to management, I would like to take a few minutes to highlight some changes that we have made to the formats of both our earnings release and our conference call. We have made these changes in order to be more responsive and provide improved communication and increased transparency to our shareholders and to the overall investment community.

You probably noticed in the release we issued earlier this morning, covering the second quarter, that we added specific commentary about each of our segments' sales and adjusted income before tax. We also added a cash flow statement to the end of the release and provided some commentary concerning cash flow from operations.

We will continue to include this information in our quarterly earnings releases and make further refinements in order to provide the investment community with more detailed information more quickly regarding our results each quarter.

The format of today's call and future earnings calls has also been changed. The presentation section of the call has been streamlined so that management can allow more time to take questions from analysts and shareholders.

The format of the call will be as follows. John will begin the call by reviewing the high-level financial results for the quarter. Don will then review the detailed financial results, including the segment results. John will conclude the presentation with a strategic business update and/or any other relevant updates. Following our prepared comments, John, Don, and David will all be available to take any questions that you may have.

Although David is no longer making a formal presentation so as to streamline the process and provide more time for Q&A, please feel free to direct any questions you may have to him during the Q&A if you feel it is appropriate. Thank you.

As I mentioned earlier, we issued a news release this morning outlining the financial results for the second quarter of 2011. If you have not yet received a copy of the release, you can access it on our website at www.MyersIndustries.com under the investor relations tab.

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

Before I turn the call over to John and Don 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 filings.

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 is a pleasure to have you with us.

I hope you find the changes Monica outlined helpful. We're striving to continue to improve our communications with you, our investors. As Monica mentioned earlier, I will begin the call by reviewing our overall results.

Net sales for the second quarter were $176.8 million, compared to $175.9 million in the second quarter of 2010. Strong sales increases in our Material Handling and Distribution segments were mostly offset by sales decreases in our Lawn and Garden and Engineered Products segments.

Gross profit increased by 560 basis points to 24.9%, compared to 19.3% in the second quarter of 2010. A favorable product mix and higher prices in several of our businesses, coupled with continued focus on our operations excellence initiatives, more than offset higher raw material costs during the quarter.

Net income was $4.7 million, or $0.13 per share, in the second quarter, compared to a net loss of $1.1 million, or a loss of $0.03 per share, in the second quarter of last year. On an adjusted basis, which excludes restructuring costs and other special items, our earnings per share in the second quarter was $0.14 versus breakeven last year.

The significant increase in gross margin was the main driver of the improvement in net income. The gross margin improvement in this quarter and the previous several quarters continues to illustrate our relentless focus on operations excellence in reducing our vulnerability to volatile raw material costs.

As Don reviews the detailed financial results, you will see that the progress we have made in each of our segments continued into the second quarter. Furthermore, our improved results over the last several quarters demonstrate that we have successfully implemented actions capable of driving improved profitability on a consistent basis.

I will now turn the call over to Don Merril, our Chief Financial Officer. Don?

Thanks, John. Since John already reviewed sales, gross margin, and net income, let's go to selling, general, and administrative expenses, and move onto the segment detail from there.

SG&A expenses in the second quarter were $35.4 million, as compared to $34 million in 2010. The increase is mostly due to higher variable selling costs in our Material Handling segment.

Cash from operations for the six months ended June 30, 2011, was $8.8 million, compared to a use of cash from operations of $2.6 million in 2010. Increased earnings was the primary reason for the improvement of $11.4 million year over year.

Capital expenditures were $3.2 million in the second quarter and total $5.8 million for the first half of 2011. For the full year, we are forecasting capital expenditures of $20 million to $25 million, versus $20.5 million last year.

The Company announced on May 2, 2011, that the Board of Directors authorized a stock repurchase program that enables the Company to purchase up to 5 million shares of its common stock from time to time in the open market. On June 1, 2011, the Company announced that it has adopted a Rule 10b5-1 plan for the purpose of repurchasing up to 2 million shares of its common stock in accordance with the guidelines specified in Rule 10b5-1 of the Securities Exchange Act of 1934.

Since the adoption of the plan, through the period ended June 30, 2011, the Company has purchased 371,779 shares of stock at an average price of $10.01, resulting in a cash outflow of approximately $3.7 million.

Including the stock repurchase, our debt net of cash was $83.8 million at the end of the second quarter. With more than $100 million of available borrowing under our committed credit agreement, our balance sheet remains strong, providing us flexibility for future growth.

Now let's turn to our business segments and their performance. Results for the second quarter are compared to the same period in 2010. I will be referencing the adjusted pretax income or loss information by segment as it appears in the reconciliation of non-GAAP financial measures included in the earnings release.

In our Material Handling segment, sales in the quarter were $67 million, compared to $62.7 million last year. Very strong sales in the higher-margin agricultural, auto, and food processing markets were somewhat offset by a $12.1 million reduction in pallet sales year over year. If you exclude the less-profitable pallet sales from 2010, the year-over-year increase in sales would be 32%.

Adjusted pretax income for the quarter was $8.4 million, as compared to $4.1 million last year. The increase of 108% is due mainly to gross margin expansion resulting from an unusually favorable sales mix of legacy products replacing lower-margin custom pallets.

Additionally, this segment benefited from increased productivity related to our operations excellence initiatives and price increases, which offset raw material inflation.

In our Lawn and Garden segment, sales in the quarter were $41.4 million, compared to $45.2 million in the second quarter of last year. The 9% decrease is a result of reduced customer demand due to poor weather conditions across many parts of the United States during the quarter, particularly in April.

The segment's adjusted pretax loss was $1.6 million, as compared to a pretax loss of $5.4 million in the second quarter of last year. You will recall that in the second quarter of last year, a spike in resin costs had a large negative impact on profitability.

As a result, we put into place a plan to drive healthy, predictable business performance. Through successful execution of that plan, we were able to improve profitability during the quarter despite a decrease in sales volume and a further increase in resin costs.

In our Distribution segment, sales were $46.1 million, an increase of 5% compared to $44 million in the second quarter of last year. The increase is due mostly to new product sales in the fleet market and new customer sales in our international business.

The new product and customer sales are a direct result of the continued focus on our strategic initiatives, which include implementing Project Enterprise, our distribution model change; growing our fleet segment by expanding our products and service offering; and expanding and growing our international business in Canada and Central America.

Adjusted pretax income was $4.5 million, compared to $3.9 million in the second quarter of last year. In addition to the improved sales, an increase in gross margin resulting from favorable product mix also contributed to the improved profitability in this segment.

In our Engineered Products segment, sales in the quarter were $27.9 million, compared to $29.7 million last year. Strong sales in the RV, marine, and industrial markets were offset by a temporary interruption in the transplant auto portion of the segment.

Adjusted pretax income was $2.7 million, compared to $3.3 million in the same quarter last year. The sales decrease was the foremost reason for the reduced profitability in this segment.

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

Thanks, Don.

As you can see, we continue to make progress towards improving our results and executing our strategy across each of our segments. In our Material Handling segment, we are benefiting from our refocus on key growth markets, which is resulting in higher sales and a better product mix. In our Lawn and Garden segment, successful implementation of the improvement plan we initiated in 2010 is leading to improved gross margins and increased profitability.

In our Distribution segment, our focus on innovation in the form of new product and new customer sales is driving increased sales and profitability. Finally, in our Engineered Products segment, our focus on innovation is driving sales growth through custom channels, while our focus on operations excellence is leading to improved profitability.

Our sustained focus on our objectives, combined with the drive in leadership that David and his team provide, is producing positive operating momentum across the Company. We believe that the progress we have made in the first half of this year demonstrates our ability to execute the improvement plans that we initiated in the second half of 2010, as well as our longer-term strategy. As there continues to be some general economic headwinds, we're cautiously optimistic about the remainder of 2011.

That concludes management's presentation. I'll turn it back over to Monica so that we can take your questions.

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

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

Good morning. Congratulations on a solid quarter, as well. And while we're talking about some of these kind of items, I do appreciate the extra color with respect to cash flow statements, things of that nature in the release.

One question, it looks like you are now including interest expense embedded down into the segments. Is that correct?

No, it's not.

Okay. All right, I will come back to that. But --

Chris, interest expense has always been included in the corporate number.

Okay. I apologize. There we go. So my question is, can you give us maybe a little bit of help with, John or David, with how you would characterize this quarter from a cost price perspective? Were you ahead, behind? How did you kind of feel working through the quarter? How does that set you up as you move into the back half of the year when it looks like resin costs seem to be abating a bit?

I think David can handle that one.

You know, our goal, Chris, has been to move pricing to offset increases in raw material costs, and I think we feel like we were able to successfully accomplish that in the second quarter.

Of course, you've got some timing issues that require some catch-up, but I think by and large we're accomplishing that objective, and that is kind of our mindset now for the business as we go forward is to move pricing with raw material costs.

Chris, I can add a little bit of color for you there.

Our price realization in the quarter was about 3.8%. And if you look at -- our resin costs were just a little bit higher than that, and that relates to the timing that David talked, so, particularly in Material Handling because there is a little bit of a lag there in our escalators and de-escalators.

So as a whole, you'd kind of characterize it as maybe a touch behind, but not a whole lot behind.

As you work into Q3 with some of the decreases we've begun to see and knowing how some of those escalators traditionally work, would you anticipate potentially being a bit ahead?

Right. That is how it should work. I think we're -- our goal is to keep up, though, with some timing issues. It will fluctuate a little bit quarterly, but I think we will largely keep up with it. So we're a touch behind. We'll be a touch ahead next quarter.

And then, as we think through each of these segments, could you talk a little bit about -- and maybe a little more detail on what volumes were like? I know you've given us some color that they were up or down within the segments, but maybe some rough percentages or approximations to help us think about that?

Sure. So if we take out price and we look at just volume quarter over quarter, we're up in Material Handling, and I'll give you another adjustment to consider after I go through these.

But if we strictly take out price and we take out pallet sales from last year in Material Handling, we're up about 22%.

Now, we did have a sale in the second quarter this year in the food processing area that fell in the third quarter last year. And if you normalize for that, because it was a fairly sizable sale, if you normalize for that, we're up about 15% which to us kind of make sense as to where the Material Handling business is in its markets. We're experiencing nice growth in that business. I think around 15% is not a bad place to think about.

Lawn and Garden, again we adjust for price, we're down about 16%. You might remember after the last call, we talked about sort of the early signs of the spring being a weak spring. What we found is it was -- some reports say that it was the worst spring on record in terms of bad weather. Rain, flooding, all of those things had an impact.

I know the big boxes earlier in the quarter were reporting down almost 30%. They caught up toward the end of the quarter as things dried out a little bit, but we're down 16% and we think that that is about right for where the market is in that business.

Distribution, I'd say up 4%. Engineered Products, down 7%, and again, that's the disruption that Don mentioned in the transplant auto.

So overall, if you kind of put that altogether for the business, we're up about 3%.

And on the transplant piece, we view that to be temporary, obviously, as those companies start to come back.

In fact, that's starting -- we're seeing it start to come back in the third quarter, and we think we'll be largely back in the fourth quarter.

That is very, very helpful. Thanks for the color. It looks like, I saw it on the press release last night, that you completed an acquisition?

We did. We're entering the processed cheese market.

We have acquired a technology and a tool that will allow was to penetrate a market that we feel is growing, with some technology that we think has a real competitive advantage in terms of providing customers with an efficient product for processing cheese and one that really takes a step forward in cleanliness. It addresses the overall sort of drive toward cleanliness in this process.

They currently (multiple speakers) wood.

They currently use wood, for the most part.

Okay, and do you have any, Don, any financials or numbers you can share with us, approximately? I guess we'll wait until next quarter to see in the -- maybe in the cash flow statement what you paid, certainly, but how big is the business, what you think the opportunity is, et cetera?

I guess we're not really prepared to share numbers around it. But I would go back and sort of characterize it as a technology acquisition.

So, it's almost as if we invested to build a new tool for a new market segment that we are entering. I don't think we're going to sort of rock the world in the Material Handling segment early on, but we think it has got nice growth potential over the next few years.

And it is a new product for that -- really a -- largely a new product for that segment that we're working to put together with a pooling capability so we can bring a full-service package into that segment. It will take some time to grow, but it will be a very nice segment over the next few years for us.

Last question I had was, as you -- it looks like you started a share repurchase program through the quarter and had made good progress there thus far. If I understand it right, there are two components. There is a portion that kind of goes on an ongoing basis, and then a portion where you're going to be opportunistic in the marketplace.

What's -- kind of walk through uses of cash as you go through the balance of the year. You've done one acquisition or a small acquisition, it sounds like, a tech acquisitions thus far. Maybe John, if you could kind of walk through your thoughts with cash flow over the balance of the year.

Chris, as we say each quarter, we're always opportunistic. We've got ourselves prepared. If you look at our balance sheet, we're prepared to make the right kind of acquisition.

The acquisition we just talked about was really a technology acquisition. It's not necessarily a company.

I think what we need to make sure that everybody listening understands is that we're still at the point of taking a look at potential opportunities specifically in one or two of our segments, and we're prepared to do that. And we'll continue to look if it makes sense and the return to the shareholder is appropriate.

Okay. And with respect to the rest of the share repurchase program that you have out there, is that something that you intend to be opportunistic about as well?

Yes. We have a defined plan as to how we implement it, and it's based on share price, so we will continue to do what we've -- the Board has agreed to allow us to do.

Okay, thank you. Good luck.

(Operator Instructions). Christopher Butler, Sidoti & Company.

Hi. Good morning, everyone. Going back to Material Handling, the results in the quarter seem to be strong. You are showing some good growth, yet at the end of your prepared comments, you had mentioned a little bit of softening. And it would seem that Materials Handling would be one of your businesses that would be exposed to this. Can you kind of put those two thoughts together on how the rest of the year is going to play out?

I would say three things that are kind of on our mind as we think about Material Handling in the second quarter, and then how it might play out going forward.

The first I already mentioned, we had some customer sales in the second quarter of this year, that typically fall in the third quarter of last year, that knocked down what I would say our normalized growth in the second quarter would have been compared to what we reported.

And of course, those sales won't come in the third quarter. It is a customer that steps in and makes a fairly large purchase of a certain product in the food processing area.

The other thing that Don mentioned about the second quarter that continues, but is something that is certainly on our mind, is we have a very positive mix of sales in the second quarter in Material Handling, and we don't expect that to continue to be as positive long term, but it certainly is at least continuing for a while.

The third thing we are seeing in some of our industrial markets is -- and I don't know about a slowing, but the backlog isn't building in those markets the way it has been through the early part of the year. So we're just taking a more cautious mindset around some of the more industrial markets that we serve in the Material Handling business as we go forward.

And just drilling down a little bit on the product mix element, you had very good improvement on the margin side of Material Handling. You have any sense on how much of that was due to the shift of mix specifically from the pallets and the changing demand from -- for those lower-margin products?

I would say that, clearly, as we talked about having $12 million worth of pallets in Q2 of last year, and then replacing them with a much higher margin in Q2 of this year really played into that.

Now going forward, that is not going to be the case, right, because we finished our -- we stopped selling pallets in Q2 of last year.

I do think, though, is we said in the prepared remarks, we had an unusually favorable mix, particularly in our [seed] business, that did cause those numbers to go up. We were at 12.5% op income in Material Handling in Q2. To give you some -- to remind you, historically we were at 10% in Q3 of last year.

And finally, if we're looking at SG&A, a pretty big change looking from the first quarter coming down to the second quarter. Could you kind of walk us through the delta there? How much of this is just timing of certain costs? And how do we think of SG&A for this back half of the year?

Oh, SG&A? SG&A, you're looking at a run rate that I think is pretty accurate for the rest of the year.

I appreciate your time.

(Operator Instructions). Brian Sponheimer, Gabelli & Co.

Hi, good morning. Just a couple of questions here. On the Material Handling side, you mentioned that you had some -- you still had some lag from resin passthrough. Should we expect that the full passthrough will be felt during the third quarter? And beyond that, what room do you think you have from a pricing standpoint to continue to really defend your margins here?

In Material Handling, we have -- the majority of our sales actually work on an escalator or a de-escalator. So as resin goes up, there's a little bit of a lag, but we do go out and capture the price on those raw materials. The same happens if it goes down. So, it really is a lag that we try to capture about 100% of that.

As David mentioned, we fall just a little bit short of that, and that's just the way the mechanisms work. But we're pretty comfortable in our ability to capture the raw material pricing in that segment.

Maybe I could add, too, just sort of the operating approach that we are taking is to develop our business in a way that we can be responsive about passing -- changing raw material costs to the market in pricing. We'll continue to have some timing issues around that, but we operate in pretty competitive markets.

Our overall goal is to continue to expand our margins by driving productivity in our businesses. I think that is where a lot of our goals around margin expansion in the future are focused. I don't expect to see a lot of margin expansion out of strictly price actions.

Okay. Speaking of the margins, we will move onto Lawn and Garden. Obviously a very nice job on a year-over-year basis. If we're thinking about from a volume perspective, is it really the $50 million level that you can say with some confidence that you could can start to generate some margin there?

Could you repeat that question?

On the Lawn and Garden side, in order to lever your fixed costs (multiple speakers)

(Multiple speakers). So you're saying that if $50 million is roughly -- you're calculating a breakeven point at roughly (multiple speakers).

Yes, I think that is pretty fair. If you look at Lawn and Garden, it is a dramatic increase year over year in profitability, mostly due to the fact of a plan that we put in place to correct how that business was operating. We were able to capture the raw material increases that happened in the second quarter of this year. In fact, propylene, which is the main resin used in Lawn and Garden, was up roughly 15% year over year, and we were able to capture the majority of that.

I will, however, mention here that in our Lawn and Garden business, because of the difficult second quarter that the industry suffered, not just us, that we will be looking going forward into the third quarter of throttling back some of our plants because we do have inventory on hand right now that we anticipated to sell through, and due to the shortened season we were unable to do that.

So, we are going into plant shutdowns right now. In fact, we're experiencing those right now, and those will have an impact on our third-quarter results.

Any idea about the competitive environment regarding pricing as far as -- I would assume that you're not the only company that has some excess inventory there. Are you getting the sense that there's going to be some price competition in the back half of the year?

I think the -- certainly, there will. It's -- that segment is one where there continues to be plenty of capacity to serve the market.

I would say the other thing that we have on our minds about that segment in the second half of the year is that with the weak spring, there are some products that our customers purchased that they didn't fully use and sell through to the consumer this year. So they will have some inventory hangover themselves.

That, we believe, will be a bit of a drag on that business in the second half of the year. There is certainly -- we just got out of the industry tradeshow, and despite the weak spring, we feel there is some optimism around expectations for planning and growing for next year. So we have some offsetting phenomenon there.

Our expectation is it's all going to kind of add up to be a continued competitive business the way it has been. We feel we've really started to get our arms around how we manage our raw materials and pricing into the market place.

So we feel better about how that is going to be going forward. And clearly in that business, we're driving productivity aggressively and we think that that is where the profit improvement is going to come in that business as we continue to drive that moving forward.

Understood. Thank you very much.

Thanks, Brian.

Ms. Vinay, there are no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you. We thank all of you for your time and your participation.

As a reminder, a transcript of this call will be available on our 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 relations tab. Thank you and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.