Myers Industries Inc (MYE) 2014 Q2 法說會逐字稿

Greetings and welcome to the Myers Industries second-quarter 2014 earnings conference call. (Operator Instructions) As a reminder at this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Monica Vinay. Thank you. You may begin.

Thank you, Melissa. Good morning and welcome to Myers Industries second-quarter 2014 earnings conference call. I am Monica Vinay, the Vice President of Investor Relations and Treasurer at Myers industries.

Joining me today are John Orr, President and Chief Executive Officer; Gregg Branning, Senior Vice President, Chief Financial Officer, and Corporate Secretary; Joel Grant, Senior Vice President and General Manager, Material Handling Segment; Alex Williamson, Vice President and General Manager, Distribution Segment.

We would like to introduce to you and welcome Alex, as he is now running our distribution segment and he replaces Todd Smith, who is now the Vice President and General Manager of our Akro-Mils and Jamco businesses. This move was made to strengthen our Akro-Mils and Jamco businesses, which are part of the material handling segment.

Earlier this morning, we issued a news release outlining the financial results for the second quarter of 2014. 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 webcast on our website and will be archived there along with the transcript of the call shortly after this 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 provision 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 filing.

I am now pleased to turn the call over to John Orr, Present and Chief Executive Officer. John?

Thanks, Monica, and good morning. It is a pleasure to have you join us. Gregg and I will discuss second-quarter results and our expectations for the second half and full year 2014. After that, we will open it up for questions.

Before we discuss the second quarter results, I would like to review several announcements that we made in June and July that positioned Myers to deliver on its longer-term goal to provide value through higher return growth businesses. If you would, please turn to slide 3 of the presentation.

On June 2, 2014, we announced that we had engaged the investment bank William Blair & Company to commence the sale of our lawn and garden segment, which we expect to be completed by mid-2015. Good progress has been made in the restructuring of the lawn and garden segment, which makes the timing of selling the business right.

As mentioned during our conference call to discuss the acquisition of Scepter on July 9, we are seeing much interest in this segment. As we said during that call, it would not be in the best interest for shareholders for us to discuss potential bidders or pricing at this time.

On June 24, 2014, we announced that we had completed the sale of WEK Industries for approximately $20 million. The sale of WEK Industries, a non-core business, resulted in a pre-tax gain of $3.7 million, which is included in discontinued operations.

On July 2, 2014, we completed the acquisition of Scepter, expanding our material handling business to include new customers, market-leading products, unique technologies, and new international markets and cross-selling opportunities. Scepter complements our material handling technologies through the use of advanced blow-molding technology, which requires use of up to three layers of material per fuel container and results in a much stronger product.

We also announced that starting with the second-quarter Form 10-Q and going forward, we will report our operating results earnings in two reportable segments: material handling and distribution. Ameri-Kart, which was previously part of the engineered products segment, will be part of the material handling segment and Patch Rubber Company, which was also previously part of the engineered product segments, will be part of the distribution segment. WEK Industries, Inc. and the lawn and garden segment will be reported as discontinued ops.

These announcements reflect the actions that we are taking to streamline our business portfolio and profitably grow our material handling segment. We have a strong market position in our material handling segment and Scepter further strengthens that position plus expands our reach beyond our historic North American market.

We expect Scepter to be accretive to earnings in 2014 and beyond. Additionally, the acquisition of Scepter should lead to increased cash flow generation and a further strengthening of our balance sheet. These actions now allow us to focus on growth opportunities and these changes will drive our longer-term growth profile by focusing on material handling and distribution, which position Myers to be a more focused, faster growing, and a more profitable company.

Now let's turn to our second-quarter results. Please go to slide 4. Net sales from continuing operations in the second quarter of 2014 decreased 0.5% to $152.8 million compared to $153.6 million in the second quarter of 2013.

Net sales in the material handling segment increased 2.5%. The distribution segment sales were 6.4% lower year over year, primarily due to the first quarter 2014 closing of the Canadian branches that were not aligned with our long-term growth and profit return objectives for the segment.

Gross profit margin from the continuing operations was 27.8% in the second quarter of 2014 compared to 29.3% in the second quarter of 2013. The lower sales and competitive pricing pressure in one of our businesses, a significant slowdown in Brazilian sales due to the World Cup activities, and higher than anticipated logistics costs led to the decline in gross profit margin year over year.

Reported income from continuing operations for the quarter was $6.3 million, or $0.19 per diluted share, compared to income from continuing operations of $7.4 million, or $0.22 per diluted share, in the second quarter of 2013.

On an adjusted basis, which excludes restructuring costs and other special items, our earnings per diluted share from continuing operations in the second quarter of 2014 were $0.22 versus a consensus estimate of $0.22 and compared to $0.21 in the second quarter of 2013, which represents a 4.8% increase over 2013.

I would now like to turn the call over to Gregg Branning, our Chief Financial Officer, who will provide you with further details regarding our financial results. Gregg?

Thanks, John. Good morning. 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. I will also review the items on slide 4 that John hasn't already discussed.

Selling, general, and administrative expenses for continuing operations in the second quarter of 2014 were $31.2 million compared to $32.4 million in the second quarter of 2013. The decrease year-over-year was driven by a decline in information technology expenses and lower compensation and benefit costs.

Our effective tax rate during the quarter was 34.2%. We anticipate that the effective rate for the full year 2014 will be 36%. Now please turn to slide 5 of the presentation.

Cash flow used for continuing operations for the six months ended June 30, 2014, was $6.8 million compared to cash flow provided by continuing operations of $13.6 million for the same six months in 2013, due mostly to an increase in working capital. We anticipate that full-year cash flow from continuing operations, including Scepter, will be in the range of $60 million to $70 million.

Capital expenditures for continuing operations totaled $7 million for the six months ended June 30, 2014. We estimate the capital expenditures for continuing operations, including Scepter, in 2014 will be approximately $30 million, and more than 65% of that will be for high return growth and productivity investments.

During the six months ended June 30, 2014, we repurchased $44.4 million of our common stock. As has been our approach, management and the Board will continuously review the opportunity to buy back shares relative to long-term investment in the strategic growth of the Company and our balanced approach to capital allocation.

We continue to maintain a strong balance sheet, which is reflected in our low net debt to total capital ratio of 34.3%. Future cash flow and proceeds from the sale of our lawn and garden segment will be used to reduce debt in line with our goal to keep our leverage ratio around 2.5 or lower.

Now let's turn to our business segments and their performance as summarized on slides 6 and 7 of the presentation. Results are compared to the same period in 2013. I will be referencing the adjusted pre-tax income information by segment as it appears on the reconciliation of non-GAAP financial measures included in the appendix of the slide presentation and in the earnings release issued earlier today.

In the material handling segment, net sales in the second quarter of 2014 increased 2.5% to $103 million compared to $100.5 million in the second quarter of 2013. Sales increases in the agriculture market were partially offset by lower sales volumes in Brazil due to the economic slowdown caused by World Cup activities.

Adjusted income before taxes in the material handling segment was $12.2 million for the second quarter of 2014 compared to $13.4 million in the second quarter of 2013. The lower sales volume in Brazil due to the World Cup activities and a competitive pricing pressure in one of the segment's businesses led to the decline in adjusted income before taxes year over year. We are adjusting our cost and pricing structure to positively overcome the pricing pressure we saw in the quarter.

Net sales in the distribution segment were $49.8 million in the second quarter of 2014 compared to $53.2 million in the second quarter of 2013. Sales decreased year over year primarily due to the segment's Canadian branch closures in the first quarter of 2014 and lower custom sales.

Adjusted income before taxes in the distribution segment was $5.4 million in the second quarter of 2014 compared to $6 million in the second quarter of 2013. The lower custom sales and higher logistics costs during the quarter led to the decrease in adjusted income before taxes compared to the second quarter of 2013.

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

Thanks, Gregg. Please turn to slide 8 of the presentation. Looking forward to the second half of the year, we anticipate that both sales and adjusted income from continuing operations will show improvement compared to last year as a result of growth strategies, pricing initiatives, cost modifications, and savings and productivity investments.

Although World Cup activities affected the second quarter, we are starting to see a more normal return to business in Brazil. Plus we look forward to meaningful progress in all of these areas. A stronger half of the year is also expected to lead to improved results for the full year compared to last year on an adjusted continuing operations basis.

Specifically for the third quarter, we anticipate the following: in our material handling segment, sales should increase primarily as a result of organic growth, the recent acquisition of Scepter, and the efforts of our now combined teams. The integration process is underway and we look forward to quick progress and a near-term transition to focus on growth with new products and new markets, as we look towards near-term opportunities with Scepter products in Latin America.

In addition, we are adjusting our cost and pricing structure to positively overcome the pricing pressure we saw in the quarter.

In our distribution segment, sales increases from organic growth, including new product introductions, will be offset by sales decreases resulting from the closure of the Canadian branches. We are addressing the higher logistics costs with increased product pricing and better load planning as we move forward.

In conclusion, we are very excited with the acquisition of Scepter and the changes we have made. This makes Myers a focused, faster growing, more profitable, and increased return on investment company.

That concludes management's presentation for today. 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 Greg, the following segment Vice Presidents are also available to answer questions: Joel Grant, Senior Vice President and General Manager, Material Handling Segment; and Alex Williamson, Vice President and General Manager, Distribution Segment. Go ahead, Melissa.

(Operator Instructions) Chris Manuel, Wells Fargo securities.

Good morning. This is actually Gabe on for Chris. Can you elaborate a little bit on the pricing pressure that you saw in material handling, what business it might be in, and how long that could take to dissipate or adjust?

Sure, Gabe. This is John. I am going to let Joel Grant field that question.

Well, it is not our practice to comment on individual businesses inside the segment. We did think it was important to note it here in the Q2. I can tell you that we have already put things in place relative to pricing and cost adjustments.

This was not necessary -- it wasn't resin related; it was really competitive pressures. So again, actions have been put in place as we went through the quarter and we would expect it to return to normal margins as we go through the second half.

Is this a product line that maybe you have seen a drop off in demand or a new entry into the marketplace or something like that? Or is it just -- ?

No, it is just a competitive pressure and an individual piece inside the material handling business.

This happens -- Dave, this is John. This happens fairly regularly where we have certain customers who create some competitive situations with either a new provider or a current competition. And so, again, we realized this early and Joel and team have put efforts in place to make sure that we get ourselves back in line there with the expected margin on that business.

Okay. Makes sense. Thank you. The other question, if we can turn the focus to Scepter a little bit. You guys have done a good job over the past couple years of protecting yourself on the resin front in your businesses. Can you talk a little bit about the contracts there, the pass-through mechanisms to deal with resin on a manufacturing front?

And then on the other side, supply contracts -- some of those products are sold more in a retail environment, not like some of the products we have now. Talk about supply contracts and how those might differ.

Yes, they are -- on the resin side of the business, it is very, very similar to what we do. And in fact, suppliers are the same suppliers. Certainly there's some opportunities there for us, especially around terms, as we will be buying resin from the same types of suppliers.

They also have similar agreements on supply. One of the things I think we have done very well at Myers Industries over the years is not be resin dependent based upon contracts with customers. There are contracts as well with Scepter and their customers, with respects to increases or decreases in resin.

Also, we have, I think, hedged our bet by making sure that we don't buy all of our resin out of the Gulf. We also buy resin out of suppliers out of Canada, so we are sure that if there's the hurricane issue -- or the latest flavor of the month is force majeure around maintenance turns and so on -- that we have covered ourselves for that. So from the resin side of the business with Scepter, we feel very comfortable that there is going to be some tremendous synergy opportunities there as well.

Scepter does have agreement sourcing agreements with major customers, very similar, again, to what we have done or what we have. These are agreements that are long-term agreements. That's in the can business.

Also in the military business, there's military contracts that are in place. For instance, they have standing agreements with all NATO countries. Scepter has also negotiated with public works and government services. Canada, which is the supply arm of the military, Scepter holds four-year-long contracts with US military for military fuel cans, for instance.

So one of the things we looked at in the due diligence is somewhat of a guarantee for a long-term business there. And hopefully that is where it you were going with that, Gabe.

Gabe, this is Gregg. I would also add while they have those long contracts, the pricing is not fixed for those long contracts. So we can adjust and will adjust and they have done that, just like our existing businesses, so we don't see volatility in resin pricing there.

If I can summarize, there are escalator / de-escalator mechanisms for resin and then on a semi-annual or an annual basis, you can go back and try to get other inflationary items along the way. And then it is incumbent upon you to become more productive year on year as well to improve profitability or what have you. This that -- good --?

Let me tweak your answer -- your comment just a little bit, Gabe. This is Gregg, again. It is not so much escalators as much as real-time quoting, like we do in our businesses that don't have escalators. They do more real-time quoting. Those quotes do not last very long, while the -- for the PO to be placed, and as resin changes, pricing changes.

Okay. Very helpful. Thank you, gentlemen.

Christopher Butler, Sidoti & Company.

Good morning, everyone. I was hoping you might be able to give us some details on the lawn and garden segment and how that performed in the quarter.

The lawn and garden segment, as you can see in the release, when you look at adjusted earnings, there was a loss. That loss was driven by some continued inefficiencies that we have seen in that business.

And while the restructuring project is complete, we have continued to see some inefficiencies, but everything has moved and we are moving forward with that. We do see the savings there, which will allow us to sell the business as planned. But it did impact us as we completed the overall restructuring.

Yes, this is John. There's also one other issue there. We saw a late start to the season because of the heavy winter and a quick end to the season -- essentially after Mother's Day, the season shut down. There was a consequential loss of expected sales and profitability there. It was a positive EBITDA, but at the op income level, there was a slight loss.

And if we are looking at the share repurchase, could you let us know how many shares you bought back in the quarter and the thought process behind fulfilling the authorization here in the first half of the year as opposed to spreading it out over the entire year?

Sure. This is Gregg again. We bought back 1.9 million shares in the quarter. Year-to-date, we bought back 2.1 million. We have bought back the entire 40 million and that was done under a 10b5-1 plan.

We still have just over 5 million authorized shares that we will continue to look at under our balanced approach to capital allocation going forward for share repurchases.

For the rest of the year.

And so just to be clear, as you think of repurchasing shares going forward, it is going to be more similar to the past few years before you had indicated that you were going to do the 40 million over a course of a year. Is that the right way of thinking of it?

I would say yes, but again, under our balanced approach, we will look at what makes sense. I don't know that we'll come out and do what we said in the first quarter, of having an explicit number of 40 million. We will buy opportunistically based on our share price and our capital allocation plan.

Okay. I appreciate it.

Let's also kind of keep in mind that at the end of last year, we had a sufficient amount of cash that we felt comfortable and the Board felt comfortable in returning to shareholders. So that is really why the dividend was increased dramatically as well as the $40 million share buyback.

And of course, when you put a 10b5-1 in, then you have to do it. You can't -- you can cancel it, but then you can't redo it for a period of six months. So that's really the reason we went forward.

With Scepter in the fold and the potential to have some more cash on your hands here over that next year, let's just say would your preference be to make additional acquisitions or return to shareholders?

Well, in reality, we certainly would have -- we still want to reaffirm, again, our balanced approach to capital allocation, which we think is best for shareholders. We would have an appetite for acquisitions, but we want to emphasize that really, we are very focused on profitable growth.

So we would look for the right acquisitions to grow material handling, with probably considerations to the products, customers, geographic markets, and technologies. But we do not intend to change the risk profile of the Company.

I appreciate your time.

Gary Farber, CL King.

Good morning. A couple of questions. On the capital expenditure side, I think you talk about growth CapEx. Can you provide some more details as far as maybe some examples of projects or things that it is being spent on? What kind of hurdle rates you look at as far as spending for those projects?

Well, most of our spending is done around new product introduction. That would be new molds, possibly technologies around equipment. At the same time, there is a certain amount of CapEx that is spent in refurbishing and maintaining our facilities.

With respects to hurdle rate, I will let Gregg talk about that.

Yes, so hurdle rate, we really treat the capital expenditures that are surrounding new products' productivity primarily versus maintenance, if you will, to look at making sure that we return much greater than our cost to capital. We don't look to actually disclose a specific number. But we clearly look for them to be accretive to earnings as we go forward and that they make sense from a standpoint of growth and meeting our overall strategic objectives.

Right. And can you give a sense for depreciation and amortization, what it might look like this year, and how it might translate next year?

Yes. This year, we expect our D&A to be approximately $31 million -- $30 million to $32 million, so if I split the difference, $31 million. That does include an estimate for the step up of D&A as a result of the acquisition of Scepter, understanding that that step up is a rough estimate until we get through the purchase accounting.

And then next year, we would expect that D&A to be roughly another -- I am going to say $4 million to $5 million greater, but we are still trying to get our arms around next year.

Okay, so like sort of mid-$30s million for the following year?

Yes. And that's our rough estimate. When I try and think of -- and by the way, that is continuing operations only. That's the rough estimate when I try and think of what Scepter will be in the fold and what our continuing operations will be on a go-forward basis next year. But we will update those numbers as we move forward and we have a better feel for 2015.

Right. Okay, thanks.

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

Just a question about lawn and garden and how you are working it with William Blair. Knowing that the business has been prone to swings in weather and/or the volatility, given weather in the past, are you demanding any sort of deal breakup fee in the event that a buyer might get cold feet should we have any sort of planting season for 2015 that does resemble the last couple?

Hey, Brian, this is Gregg. What I will tell you is at this point, we haven't gotten that far to determine that. We are still at the early stages of the process and expect to start receiving bids in the near future. So once we get further down the line, then we will the able to better determine whether a breakup fee is necessary.

And answer his question.

Yes.

All right. And as you said, you show timing by the middle of next year. When do you plan on having initial bids in for the business?

I don't know for sure. It just depends on timing. But I would guess that we'll start seeing initial bids in the September timeframe. That is a rough estimate right now. But I know that William Blair is moving down the path to get all the materials out to potential bidders.

Okay. And if I am thinking about -- you talked about competitive pressure for the back half of the year. And what you are saying -- I mean, from what I think I am hearing is that these pressures are likely to persist. What was it that created the situation where the customer -- or, I'm sorry, the competitor decided to get competitive on pricing?

Yes. This is Gregg again, Brian. What I would say is we don't expect them to persist. It was a given bid project that we decided to bid at. It was a multiyear project to retain.

As to why the competitor did what they did, obviously, we don't fully know, because we weren't in their shoes. But the key is we don't expect it to continue to impact us as we have adjusted other pricing and primarily also our cost structure to take that into account and negate it.

And what market was this in? Was this North America or South America?

North America.

It was in North America.

And it was Buckhorn or Akro-Mils?

Again, we are not going to -- given that it is not -- that the given company is not a segment, we don't want to disclose the company.

Okay. All right. Thank you, guys.

Chris Manuel, Wells Fargo Securities.

Couple of questions. I apologize; I was down the hall earlier. But a couple of questions. One, if I could come back to Brazil for a second. I think you talked about seeing some softness there around the World Cup and timing.

One of the other big changes that we have observed, looking at some of the beverage consumption patterns there, has been a real pickup in one-way packaging. Almost 10%-plus in the marketplace away from some refillable glass. And I believe that is where your cartons and crates that you're selling down there are geared.

Have you seen anything different with whether it is stuff in your order patterns today or discussions you had with your customers that suggests that you'll see that business pick back up our may we stay at these kind of levels for an extended period of time?

Chris, this is John. We have -- what we have seen is really -- you are right. There is a one-way packaging issue that is going on in Brazil. I think the attempt to negate that on the part of the beer manufacturers is to crate smaller bottles.

And in which case, they are 300 milliliters now instead of 600 milliliters. They are called the [Litrino], in fact. That has required all brand-new crates to be produced, which is what we are producing now, for the largest beer producer in Brazil.

Glass, actually, glass is a better deal in Brazil for the average consumer, because they can take it home, they can drink it, and they can take the glass back and get some money back, whereas the one way packaging, they don't. Certainly our customer, our major customer there, who is 70% of the market, has a pretty good feel, I think, for where that market is going to go.

And that is why we have spent the last six months producing new molds for these new crates. So we are still pretty comfortable that there is a huge opportunity there.

There's also another opportunity and that is in the replacing wooden pallets with plastic pallets. And Buckhorn or Myers do Brazil, which is Buckhorn in Brazil, has that capability of doing that. And that's certainly a project that we are spending some time with our customer on.

Okay, just to make sure -- a clarification to make sure I understand this. I wholly agree with you and you have done a lot of work, actually, around the packaging shift. And the concept of Brazil --

[Smaller] bottles.

Being able to much more affordable than to be able to rent the package and buy the content as opposed to buying both. But the shift from 600 milliliters to 300 milliliters bottles and your crates being shipped ahead of that, has that already transpired? Have you already been shipping those smaller sized crates or is that something that through the back half of the year will be picking up?

We have started shipping some of those crates. This is a continuing process. It is probably going to go on over a three or four year period. It is a significant amount of their manufacturing capability -- their production capability.

Okay. That's very helpful. Other question I wanted to ask Gregg is appreciating there is a lot of moving components this year, with Scepter coming in and LNG going into discontinued ops and then the WEX business, et cetera.

Your -- if you could maybe give us an update on two pieces. One -- really what we are trying to get at is free cash flow and what the normalized level 2015, 2016, beyond would be. So can you give us maybe as a sense of what the op cash flow perspective looks like, if that is appreciably different beyond that?

You have been kind of in that $60 million range. Last year was a big number. But if we look forward at 2015, 2016 -- realizing this year is noisy -- but 2015, 2016, is that something that gets into that up --? I think you talked maybe about $60 million to $70 million here in 2014. But 2015, 2016, as all the ebb and the flow are done, is something toward the high end of that range a normal sustainable level?

Yes, Chris, this is Gregg. Obviously, you're right. There are a lot of moving parts. We haven't fully -- we've had Scepter for less than a month so far, but current early estimates and belief is that going forward beyond 2014, where we have them for a full year, the free cash -- the operating cash flow and the free cash flow from a continuing operations business should be definitely at the higher end of that.

You are right that we did see a higher number last year and that was due to the one-time benefit of us being able to change some of our purchasing terms. But certainly, we would -- Scepter should bring us nice cash flow going forward.

Okay. That's helpful.

And that cash flow -- also, just to be clear, that cash flow will be definitely better than what we are giving up with the sale of lawn and garden. As well as more stable.

Okay. That's helpful. Two last quick ones. One, John, could you give us an update on where you are with new products through the system? I mean, I know that's a number that has been kind of moving up this scale. We ask you this, I think, every quarter, but where you are and that phasing as you sit today?

Yes. 55 new products this year, not counting (technical difficulty) I'm sorry? Oh, 10%. I was getting a signal there it was 10%. But there is 55 new products and that doesn't really count new products that I think Scepter is going to bring on to us. That we don't have a number yet.

Oh, that's fine. And I appreciate there will be some moving components there. And then the last was when we look at the corporate component, as it shakes out between the two divisions now, what is left -- how will that translate as we look to the next couple of quarters?

I mean, it used to run and that $5 million, $6 million range. I know it was a little higher in 1Q, a little lower in 2Q, but what is kind of a normalized rate there? Or --

This is Gregg, Chris. I think that the normalized rate for corporate, we won't see a significant change upwards or downwards with lawn and garden coming out and Scepter coming in.

Okay. So it is still probably something in that $5 million, $6 million range, normalized quarterly?

Correct.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Ms. Vinay for any closing comments.

Thank you, Melissa. We thank all of you for your interest in Myers Industries and your time and participation today. As a reminder, a transcript of this call will be available on our website within approximately 24 hours.

A replay will also be immediately available via webcast or call. Details can be found on the Myers Industries's website under the Investor Relations tab. Thank you for joining us and have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.