Myers Industries Inc (MYE) 2012 Q1 法說會逐字稿

Greetings and welcome to Myers Industries' Q1 2012 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 pleasure to introduce your host, Ms. Monica Vinay, Director of Investor Relations. Thank you, Ms. Vinay, you may begin.

Thank you. Good morning and welcome to Myers Industries' first-quarter 2012 earnings conference call. I am Monica Vinay, the Director of Investor Relations at Myers Industries. Joining me today are John Orr, President and Chief Executive Officer; David Knoll, Executive Vice President and Chief Operating Officer; and Don Merril, Senior Vice President, Chief Financial Officer, and Corporate Secretary.

Earlier this morning we issued a news release outlining the financial results for the first quarter of 2012. 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 the transcript of the call shortly after the event.

In an effort to continue to be more responsive and provide increased transparency and improved communications to our shareholders and the overall investment community, we have added a slide presentation to today's webcast. The presentation will be referenced throughout the call and can also be accessed on our website under the investor relations tab.

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 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.

Further information concerning these risks, uncertainties, and other factors is set forth in the Company's periodic 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's a pleasure to have you join us.

Starting with slide 3 of the presentation, I will review the first-quarter highlights. Then Don will provide further details regarding our results for the quarter and give some segment commentary. After that, I will conclude the presentation portion of the call with a brief summary and outlook for the remainder of the year. We will then take your questions.

Net sales increased 1.7% to $198.8 million from $195.5 million in the first quarter of 2011. Sales increases in our Engineered Products and distribution segments were partially offset by sales decreases in our Material Handling and Lawn & Garden segments. Don will provide more detail about these sales variances.

Gross margin increased to 29.2% as compared to 27.7% in the first quarter of 2011. A favorable product and customer mix, cost reductions generated by our operations excellence initiatives and raw material cost savings were the key drivers of the increase year over year.

Net income for the quarter was $10 million or $0.29 per diluted share compared to net income of $6.7 million or $0.19 per diluted share in the first quarter of 2011. On an adjusted basis, which excludes restructuring costs and other special items, our earnings per diluted share in the first quarter were $0.30 compared to $0.20 in the first quarter of 2011.

As we noted in the earnings release this morning, this is the sixth consecutive quarter that we have been able to deliver improved operating performance as a result of the consistent execution of our strategic principles focused on customer dedication, innovation, operations excellence, organization development, and financial strength.

Although our Material Handling and Lawn & Garden segments experienced stronger than anticipated sales during the first quarter of 2012, through the solid execution of our operations excellence initiatives, both segments realized material cost savings by increasing the use of alternative materials and both segments generated lower manufacturing expenses as a result of productivity improvements.

Our Distribution and Engineered Products segments achieved sales increases year-over-year during the first quarter of 2012 partially as a result of their focus on customer dedication and innovation. Both segments have been successful in expanding their customer base and increasing sales with current customers through the introduction of new products and services.

Before I turn the call over to Don, I would like to comment on a recent recognition that we received. I am pleased to inform you that the Company was recently named one of America's 100 Most Trustworthy Companies in an annual survey commissioned by Forbes. The 100 Most Trustworthy Companies list was compiled by GMI ratings, which analyzed more than 8000 companies traded on US exchanges with market caps of $250 million or more.

GMI ratings ranks the nation's top 100 companies that have consistently demonstrated transparent and conservative accounting practices, solid corporate governance and management with low shareholder risk.

I will now turn the call over to Don Merril, our Chief Financial Officer, who will provide you with details regarding our financial results. Don?

Thanks, John. Good morning, everyone. I will comment first on the overall financial results, which are summarized on slide 4 of the presentation. Then I will review the results by business segment.

Since John has already commented on sales and gross margin, I will begin with SG&A.

SG&A expenses in the first quarter of 2012 were $40.9 million compared to $41.7 million in the first quarter of 2011. The $800,000 decrease in SG&A quarter-over-quarter was driven primarily by a $1 million recovery of a past due trade receivable and partial reversal of the bad debt accrual related to this one specific customer. This bad debt recovery partially offset an increase in healthcare-related expenses.

Our effective tax rate during the quarter was 37.7%. We anticipate that the effective rate for the full year 2012 will be approximately 39%.

Cash flow used for operations for the three months ended March 31, 2012, was $6.4 million compared to $400,000 in the first quarter of 2011. As is typical during the first quarter of the year, there was a seasonal increase in working capital that resulted in a use of cash during the quarter.

Capital expenditures totaled $3.1 million for the three months ended March 31, 2012. We estimate that capital expenditures in 2012 will be approximately $30 million and that the percent of growth-oriented projects will be about 50%.

At March 31, 2012, debt net of cash was $76.9 million compared to $67.2 million at the end of 2011. We used our line of credit to fund the buildup of working capital due to growth.

Now let's turn to our business segments and their performance as summarized on slides 5 through 8 of the presentation. Results are compared to the same period in 2011. I will be referencing the adjusted pretax income information by segment as it appears on the reconciliation of non-GAAP financial measures included at the end of the slide presentation and in the earnings release issued earlier today.

In the Material Handling segment, net sales for the first quarter were $65.2 million compared to $65.7 million in the first quarter of 2011. Sales increases in the agricultural and food processing markets were fully offset by sales declines in the less profitable manufacturing and automotive markets. We anticipate soft sales in the food processing and ag markets in the second quarter of 2012 compared to last year as the result of a delay in demand for orders.

Adjusted income before taxes in the Material Handling segment were $13.2 million in the first quarter of 2012 compared to $10.3 million in the first quarter of 2011. A favorable customer and product mix as well as lower manufacturing costs resulting from the Company's operations excellence initiatives more than offset the impact of the modest decline in sales.

Net sales in the first quarter in the Lawn & Garden segment decreased 11.9% to $59.2 million from $67.2 million in the first quarter of 2011. You may recall that we noted in our fourth-quarter 2011 earnings call that customers took advantage of the segment's improved operating and delivery capabilities to accelerate shipments into the fourth quarter 2011 that would normally take place in the first quarter of 2012.

Additionally, sales were unfavorably impacted by the unusually high levels of customer inventory resulting from the terrible spring weather in 2011. Currently in the second quarter of 2012, we are seeing a strengthening in the market due to more favorable weather conditions.

Adjusted income before taxes in the Lawn & Garden segment was $1.2 million in the first quarter of 2012 compared to $3.9 million in the first quarter of 2011. The segment was able to offset a portion of the income lost due to lower sales volumes through the continued execution of its profit improvement plan and through its focus on operations excellence.

Net sales in the Distribution segment increased 2.7% to $42.7 million in the first quarter of 2012 compared to $41.6 million in the first quarter of 2011.

New product sales and services resulting from execution of the Company's strategic initiatives and customer dedication and innovation more than offset an overall market weakness during the quarter. We anticipate that we will continue to combat headwinds from a decline in replacement tire sales and miles driven caused by higher fuel costs.

Adjusted income before taxes in the Distribution segment was $3.9 million in the first quarter of 2012 compared to $3.3 million in the first quarter of 2011. A favorable product mix of supplies versus equipment combined with the increased sales lead to the improvement in income before taxes quarter-over-quarter.

Net sales in the Engineered Products segment were $37.2 million in the first quarter of 2012 compared to $27.9 million in the first quarter of 2011. Strong sales in the transplant, auto, marine, and custom markets generated most of the 33.3% increase in sales during the quarter. We anticipate that demand in the transplant auto market will return to more normal levels by the end of the second quarter and expect the strong sales in the marine market to continue.

Adjusted income before taxes in the Engineered Products segment was $4.7 million in the first quarter of 2012 compared to $2.9 million in the first quarter of 2011. The significance sales increase and a favorable customer and product mix drove most of the improvement in pretax income.

That concludes the financial review. I will now turn the call back over to John for some summary remarks. Thanks. John?

Thanks, Don. Please turn to slide 9 of the presentation. We are pleased with our strong start to 2012 and continue to expect that this year will be another year of solid results. As we consistently execute our core strategic principles of customer dedication, innovation, operations excellence, and organizational development, we will see the benefit of these actions in our financial strength.

As Don indicated, we anticipate a shift in demand from the second quarter to the second half of this year in the food processing and agricultural markets of our Material Handling segment. We see a strengthening in the market in our Lawn & Garden segment beginning in the second quarter as a result of favorable weather throughout most of the country compared to last year.

In our Distribution segment, we anticipate that we will continue to combat headwinds from a decline in replacement tire sales and miles driven through our continued focus on customer dedication and innovation.

Finally, in our Engineered Products segment, we anticipate continued strength in the marine market as a result of further customer conversions to our EPA approved fuel tank. Additionally, we expect that demand in the transplant auto market will return to more normal levels by the end of second quarter of this year.

That concludes our presentation. I will 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. As a reminder, please keep in mind that in addition to John and Don, David Knowles, our COO, is also available to answer questions. Go ahead, please.

(Operator Instructions). Chris Manuel, Wells Fargo.

Good morning, everyone. I am really going to test and see if David is there, so I'm going to ask him a question. I wanted to start -- thank you for the slides and thank you for the color. But I was hoping you could kind of run through the different segments and I know this is sometimes a difficult way to look at it, but if you could give us a sense of what you feel volumes were like on a year-over-year basis in each of the segments.

And then my follow-up to that is after posting a very, very strong 1Q, you had some comments in here about kind of a little bit how the balance of the year would play out, but was there anything maybe that was pulled ahead in 1Q that will negatively impact the balance of the year or -- I guess what I'm trying to understand is, A, how you did in 1Q? How that is going to impact or what your outlook still is for volumes for the balance of the year?

And then if there's anything pulled ahead that would suggest that the balance of the year doesn't continue at this pace, if that makes sense?

Sure. I am here, Chris, so --

And that is a lot of questions in there, too, by the way.

I'll see if I can go through that by doing something similar to what I did last time, where we talk about the markets that we are serving or the index that we track, what they are telling us and how we are trying to respond to those.

So let me just kind of walk segment by segment. The Material Handling market, what we have seen over the last several quarters has been growth in the Material Handling industry and that has been reflected in the Material Handling index though we see the year-over-year growth starting to taper off in that index, that index now is in the single digits of growth, whereas a year ago we would've seen that index in the double digits. And I think we are seeing that in the industry.

We talked a little bit about first-quarter automotive and manufacturing being softer for us versus the first quarter of last year. I think that reflects more what we saw as some pent up demand in the first quarter of last year that was stronger sales in those segments and so we saw it softer this year. There's still activity. There's still growth in those markets, though it's softer for us, and those are markets we are not focusing our resources on as greatly as we are the food processing and agricultural markets in Material Handling.

John mentioned that we are -- as we go forward, that index continues to show us that we should see some growth in the market. We expect to see growth in the market. We do see this sort of shift in kind of this order pattern. Mostly what it is is we had strength in the second quarter of last year in our Material Handling business. You may recall last year we talked about kind of an unusually strong order pattern in the second quarter of last year. And we don't see -- we see it returning a little bit more toward kind of the normal seasonal order pattern, which should put more of those orders in the second half of the year than in the second quarter.

I think that's kind of covers the Material Handling segment. I can follow up.

If we move to Lawn and Garden, I think John and Don talked about how we've kind of been working our way through the challenges that we saw from a very weak 2011 spring season. There were a few challenges. One is that there was a significant amount of inventory built throughout the supply chain that we have been working our way through all the way into the first quarter. We also had a weaker market out there and we were being more cautious about how aggressively we were looking at things like taking credit risk and stuff like that.

And then the third is we mentioned how our cycle time had shortened in our operations and we were able to ship more quickly and so we were able to ship more orders in the fourth quarter than we would have typically. And all of those added up to have an impact on the first quarter.

We have seen -- there has been a warm winter and a warm early spring and that gives us some good indication that there should be strengthening in that market. We're starting to see some strengthening in that market and we think that that should have a favorable impact on us as the year moves forward because we are not going to have that over inventoried supply-chain and if the season continues to stay warm, we will see more of a second turn in the growers and continued demand that will I think be favorable to us as the year plays out through the rest of the year.

In Engineered Products, the big drivers there were this catch-up in the transplant auto sector from the disruptions that they had last year from the tsunami and the floods in Thailand. We have had a real strength in our business in the fourth quarter and the first quarter as a result of that. We have had strengthening in our marine business because of the penetration of these EPA-compliant fuel tanks and we have had some custom contracting business in our -- in the rubber part of that business, all of which have added up to present some real strength.

We see the transplant automotive returning to normal levels. We see continued strength in the marine segment as we continue to -- the industry is really sort of scrambling now to comply with the EPA requirements. And probably some tapering off in the contract manufacturing side of the business.

But I don't think anything that fundamentally says those markets are turning in a bad direction. We just may not have continued surge like we have had in the last couple of quarters.

In the Distribution business, I would say that we have had some growth in that business but we have been fighting against some real headwinds that result from higher gas prices. Higher gas prices have, we believe have depressed miles driven and replacement tire sales and some of the indexes that we are following, when we talked earlier in the year we said that we are forecasting those indexes to the flat to maybe down a little bit. The early indication from those indexes that they all are and they may be down somewhere in the mid single to almost double-digit levels.

We think that we have been fighting those headwinds pretty effectively in the first quarter. We think those headwinds are going to stay with us. Gas prices are still high. We think it is going to have a depressing impact on miles driven and replacement tire sales and we're going to continue our efforts to try to penetrate the market, be innovative, serve our customers better to fight that, but we are definitely fighting against headwinds in that segment.

Okay, if I could follow up on one piece back to the Lawn & Garden comments, at this point in time do you feel that most of the excess inventory and such is kind of flushed through the system, that we could -- or do you still feel there's some more headwind left there?

I think we have largely worked our way through that problem. That problem persisted into the first quarter, where really -- when we talk about the fees and the season of when they are planting and delivering is a fairly short period of time, so it lasted into that first-quarter season, but I think that we are starting to see signs that people are trying to place some fill-in orders on places where they may be light in others.

So we are starting to see the signs that we've kind of worked our way through that problem.

Actually, Chris, this is John. We're actually seeing some things like ferns especially in the South are very hard to find and so the growers are being asked to regrow immediately and of course, that requires us to make fern pots. So I agree with David that I think we have kind of flushed our way through the inventory situation and we are looking forward to the possibility of some additional manufacturing in this quarter and next.

Do you feel that -- and my one last question on this segment -- do you feel that you would be prepared -- it almost in some ways sounds like it will be the mirror image of last year, exact opposite in that you produced a bunch and then the weather was rather unfavorable and this year it sounds like inventories are down and we have a very favorable weather year that are you comfortable that if there is a reasonable pickup or a sharp pickup in demand that you'll be able to monetize that well?

I think that your comment is, I think a pretty good comment and I think we are prepared to take that challenge on. That's certainly a better challenge than what we had at about this time last year and that team has done a lot to get those operations focused to serve customers and I think we are ready to take it on.

Okay, last question. I have a bunch more. The last question I will and then I will turn it over, is that normally we talk about new products as well, so could you give us an update where you are at? I think you have talked in the past about if memory serves something in that 3% to 5% range of what you target -- where you are seeing new products introduced, maybe levels you are at now, types of products, etc.?

Go ahead, David.

I guess from an overall standpoint, we track our initiative, our innovation initiative, which are new products, services, introduced through the initiative in the last three years and we track the revenue generated by those versus our total revenue. I think we said earlier in the year that we expect our business to be around 5% or better than 5% this year and I would say we are tracking consistent with that expectation.

We do have some important rollouts. We have things -- and if you talk about new products introduced in the last three years, you have some things rolling off of that not so much right now but we will have some things rolling into that. And there's some important ones that are yet to roll onto that for us as we go forward that we are -- you can't perfectly predict the commercialization time on that, but we've got some things out in front of us yet.

Could you give us a little color maybe which segments and types of stuff without --? I appreciate you don't want to be too granular but --

I would say of course, we've focused a lot of our investment in energy and if you look -- Don mentioned we're spending 50% of our capital on growth-oriented projects and I would say the majority of that investment is going in the Material Handling segment to support tooling and equipment required to bring some of the new products to the market.

We have announced some things. We just introduced last year the Maximizer and we're starting to get some traction with that. We introduced a new lightweight bulk box at the very end of last year which looks very promising for us. We bought the cheese box technology, have kind of worked to develop that and that's something that has not yet reflected in our sales and we are bullish on that as we go forward and think is going to start reflecting in our sales this year.

Thank you much. I have a few more questions but I will jump back in the queue.

Adam Josephson, KeyBanc Capital Markets.

Thanks and good morning, everyone. Can you elaborate on some of the productivity initiatives that led to this substantial gross margin improvement in the quarter and how much of the gross margin improvement was related to productivity versus product mix?

The productivity initiatives are -- we kind of break them down into three categories -- material-related, labor and overhead-related, and distribution logistics. We frankly had initiatives in all three of those this quarter and reasonably evenly balanced between those.

It would get sort of granular segment by segment to go into which of those, but I would say material, we have been driving a heavy focus on material in both Lawn & Garden and the Material Handling segment and seeing continued progress in that. We've had substantial improvement in both Lawn & Garden, Material Handling and our Engineering Products segments in driving productivity.

We have driven ourselves to higher levels of uptime. We have moved in many of our segments from 24/7 shifts down to five-day shifts, where we're just generating a higher level of productivity out of our plants. And we have some logistics projects that are driving some cost savings as well.

So I think kind of generically that is the key things that we are doing. We are getting -- I think we reported about the level of savings that we got out of our operations excellence initiative last year; it was about $14 million. We're targeting something similar this year and I would say we are on track to be able to deliver that kind of productivity or savings performance this year.

I would add to that, Adam -- this is Don -- I would add that incrementally in the quarter we had about 1.5% to 2% of additional productivity, that's incremental productivity over last year.

David, if you had to estimate what stage you are in the process of implementing all of these improvements, what would your best guess be?

There's really no finish line. This is John. Adam, there's really no finish line there. You could say are we in the first quarter of the game? Yes, probably. But when you talk about lean manufacturing techniques, the things that you are constantly doing is -- there's really no finish line to them.

We are in it. We are going to continue to play in it. We continue to train people around those techniques and we will expect to use this for many years going forward.

Just to add, there's no doubt there's a phenomenon of picking up the low hanging fruit first and then kind of moving higher up. We got off these analogies but moving higher up and it gets harder and harder, but our goal is to make our team a stronger and stronger team so that we can do that more effectively./

So as John said, we don't see the process ending. We've gotten through a lot of the easy stuff. The stuff we're doing now is in the intermediate area and we're going to have to sharpen our skills to continue to be able to do this as we go forward.

That's helpful, thank you. Regarding SG&A, what do you think is a sustainable level of SG&A or SG&A to sales for the Company? It was unusually high last year at 20.5% of sales and I know that number was high partly because of M&A and bad debt expense. So what would you think would be a meaningful level?

I would say on an adjusted basis in Q1, we were about 20.3% and I think that level based on some of the initiatives that we have coming in 2012 such as upgrades to some of our ERP systems, etc. to make us that much more customer-centric and productive, that is a pretty good average for the rest of the year. We are going to be somewhere right around 20.5% for the full year.

And remember that we keep our distribution and logistics warehousing costs in freight --

In SG&A.

-- in freight and logistical (multiple speakers)

We keep freight in there and also 25% of our business is the Distribution business, which is virtually all SG&A.

Right. No, that's helpful. And then just two segment questions, one on Material Handling. To what extent do you think that segment has become less economically sensitive in recent years because of the growth of the agricultural and food processing piece of the business?

I would say this, we are targeting the food and ag segments because we believe there is growth opportunity in replacing traditional packages with returnable plastic packages. So it's a growth market for us.

But the other thing I think is important to remember is in that segment the purchase that our customers make is a capital purchase, so even in these segments where we are replacing cardboard or wood or something like that, which tend to be expense items, we are replacing them with capital items for the customer and there's going to be cyclicality to that.

So we have a focus on growth markets that we think is going to really pay off over the long term in driving more growth and value in that business, but it's not going to entirely insulate it from capital spending cycles in the industry. Maybe a little less prone but not entirely insulated from that.

That's helpful, David. Thanks. One last one on Distribution. Is it reasonable to expect continued EBIT growth in Distribution if the overall market continues to decline?

Yes, I guess we have a number of initiatives that are oriented toward driving operations excellence. We've talked about Project Enterprise, which helps us grow our EBIT call it in a flat market. We have our next wave of initiatives is focusing on modifying how we bring our product to market so we can bring a greater level of value to our customers. And in a flat market, that ought to allow us to perform better than the others serving those customers

But the broader question is if the market is flat forever, then it's going to be challenging to continue to do that, but we don't expect the market to be flat.

One other thing we've got there is new products as well. We have -- we continually bring new products to market in Distribution, which should bring a higher profit margin as we move forward.

Thanks, everyone. That's really helpful.

Christopher Butler, Sidoti & Company.

Good morning, everyone. First question is on Material Handling. With some of the volume weakness that we saw in the first quarter, it was lower margin business, so you had a pretty good bump in operating margin. It sounds like for the second quarter, this is more on the food processing ag side, so this is your higher-margin business. Is that an appropriate way of thinking about it?

That's correct. Keep in mind what we are talking about here, Chris, ultimately is just a shift in those orders. So versus last year. Last year we had a strong second quarter and now we are looking at providing these -- providing the orders a little bit more closely to when the customer needs them.

I see. In Engineered Products, it sounds like you have at least another partial quarter of good, strong growth. Is that a direct counterbalance to Material Handling in the second quarter? Does it offset the weakness?

I don't think so. It will certainly in part. I think we are looking at a second quarter that's going to remain strong similar to the first quarter and then as we see, as David talked about, the transplanted automakers come back to what we would consider to be normal levels. We will see that get back to normalcy in the third quarter.

With the SG&A you had mentioned a recovery in the quarter. Could you review that again for me?

In the first quarter, we did have a recovery of a bad debt that we had fully reserved so we were able to pull that into the first quarter and that was about $1 million. So that's why you see SG&A a little bit lower than what you would normally anticipate.

Now the offset to that we're starting to see some high healthcare expenses come through and that virtually offset the bad debt reversal of that reserve.

Shifting to the balance sheets, with the cash outflow in the first quarter, it looks like that was mostly attributed to accounts payable for comparing to the first quarter last year. Was there any change to how you are doing business there? As far as share repurchases, when you kind of get to an inflow, do they come back onto the radar screen?

No, typically what happens in the first quarter, you can go back certainly to when I began here in 2006, the first quarter is a negative cash flow quarter for us. Every other quarter tends to be positive and it's basically as we ramp up for the year, it is a lot of seasonality involved and really if you look at it, Chris, and look at the balance sheet, it's all of our working capital inventory tends to creep up a little bit. AR creeps up to grow and accounts payable goes the other direction, so that's typically what happens in the first quarter.

I understand that, but just a direct comparison to last year in the first quarter where a seasonality should be taken into consideration there was a significant difference in the outflow, which seems to be due to accounts payable. So you are saying nothing specific in accounts payable, just timing and things?

It's absolutely timing. I'm sorry, it's absolutely timing. Mostly due to raw material purchase of resin.

And as far as use of cash and repurchases going forward, thoughts there?

We are going to be as consistent as we have been around cash, focusing on the needs of the business. I would say as far as a repurchase goes, we run the model to see if it makes economic sense for us and we will continue to do that and when it does make sense, we will do that.

And just finally, where do you stand on the portfolio, acquisition targets, divestitures? Where do you stand as far as that's concerned right now?

As we did last year, we took a look at a couple of opportunities. We got very close but we just didn't see the financial -- meeting the financial hurdles that we thought would be in the best interests of shareholders.

As we move forward in 2012, we will continue to take a look at what opportunities there might be out there from a bolt-on acquisition standpoint. And if its right and meets all of the characteristics that we need, then we will go ahead with it. But at this point we don't have anything to announce.

As far as divestitures, any change in the way you are viewing your four businesses at this point?

No, there's really no change there. We continue to indicate that the growth segments for us would be Distribution and Material Handling. We continue to work with Lawn & Garden and as you know from last year, there is dramatic improvement there and the same with our Engineered Products division, so there's no real change there on divestiture.

I appreciate your time.

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

Good morning. Just one question on operations and then another on cash flow. So looking at the Lawn & Garden division, you had about a $2.7 million decline in profitability on an $8 million decline in sales. It's about a 34% decremental margin there. Given this sales level, do you think that should we see a strong growing season and a strong second quarter here, you could achieve the same type of incremental margin on an increase in sales?

Yes, I would say that is a pretty fair comment.

As far as capacity within that division, would you say that the $60 million level is basically where you could begin to really ramp and lever some of your fixed costs?

Yes, again I think that's a fair comment. I think what you saw clearly with a 34% decremental level is when you start getting closer and closer to that breakeven number you start to see bigger numbers incrementally and decrementally, so the same thing would be true on the other side as we leverage a lot more of our fixed costs.

Okay. All right, great. Thanks, that's helpful. Just I want to go back to potential acquisitions. With your previous comments obviously noted, what is your sense of the acquisition market as far as relative to, say, three months ago and a year ago becoming more attractive, becoming less attractive? And potentially where you think the best opportunities to potentially make something that you could finalize would be?

The acquisition markets are hot right now. Financing has kind of come full circle in the last few years. We've seen a lot more deals out in the marketplace. We are seeing some deals in the Material Handling side of the business.

When you think about it, though, again for us it's dependent upon meeting the financial hurdles that we think are necessary to give the shareholders a proper return. Like I said, we are continuing to look. We will -- we've got ourselves, our balance sheet is in pristine shape and we are more than adequately ready to do what's necessary to do once we meet those hurdles.

But it's a fairly robust market out there. A lot of private equity stuff that's coming out. People are selling businesses they bought three, four, five years ago so there's a lot out there, a lot on the horizon.

Okay, thank you. And then just one more. There's been somewhat of an exogenous event in the auto industry with the explosion at the resin factory in Germany for CDT. Any effect on your operations given the use of PA 12?

No, we don't use any of that. That's only in fuel lines, automotive fuel lines. We don't use anything as exotic as that.

Okay, great. Any chance that demand for some of the additives and resins that you do use could potentially affect your product line at all or your supply line?

I don't think so. David -- I don't think there's anything.

You know, we have most of our products we've got multiple sources and we have a strategy to try to maintain multiple sources. On any of the things that we have unique sourcing arrangements, our people are working on making sure we've got good contingency plans to have a source and we don't see anything right now that would disrupt our ability to meet the needs of the market.

Okay, great. Thanks so much.

(Operator Instructions). There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thank you. We thank all of you for your time and your participation today. 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 our website under the investor relations tab.

Thank you for joining us and have a great day.

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