Myers Industries Inc (MYE) 2016 Q1 法說會逐字稿

Greetings and welcome to the Myers Industries, Inc. first-quarter 2016 earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

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

Thank you. Good morning. Welcome to Myers Industries' first-quarter 2016 earnings call. I'm Monica Vinay, the Vice President of Investor Relations and Treasurer at Myers Industries. Joining me today are Dave Banyard, President and Chief Executive Officer; and Kevin Brackman, Vice President, Corporate Controller, and Interim Chief Financial Officer.

Earlier this morning, we issued a news release outlining the financial results for the first quarter of 2016. 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 a 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 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 on the Company's 10-K filings.

I am now pleased to turn the call over to Dave Banyard.

Thanks, Monica, and good morning, everyone. Thanks for joining us. I'm going to start on slide 3 with a summary of Q1 2016. In general, I'd like to start by saying I'm very pleased with our results in the first quarter, mainly because we came in exactly where we thought we would. I think it's very important that you do what you say you are going to do. And I'm very excited that we did that, both on the top and the bottom line.

Going through the summary here, our net sales were down 3.3%. About 2% of that was currency; and, organically, we were down 1.3%. And again, this is in line with our expectations. Our gross margins were up nicely, 260 basis points, to just under 32% due to a combination of lower input costs and operational improvements, along with some product line rationalization.

Our adjusted earnings per share were up 75% to $0.21, and our free cash flow -- I'll pause here for a minute. It's a negative number, but it was $4 million better than last year. And just to remind everyone, we do have a bit of a first half/second half seasonality to this business. So, generally speaking, we do have a negative cash flow in the first quarter, and I'll go into more detail on that in a later slide.

We did have several large -- one-time charges that we had in the quarter that I'll go into more detail on later on. But $8.5 million of that was non-cash impairment charges in our Brazil business, and $2 million related to severance charges.

Next slide. I'll go into a little more detail on the financial summary, starting at the top with our sales, down 1.3% on an organic bases. And I want to highlight here that if you factor in the price reduction that we have from our resin -- that business's index to resin, we were up in volume by about 1.3%. So not a bad result.

On the gross profit line, up 260 basis points, a real nice operational improvement there. About half of that improvement was from our input costs, our resin costs. The other half was from operational improvement and product rationalization. I will also say that we were up about the same amount, in 260 basis points, on a sequential basis from Q4. And as I pointed out, we do have a seasonality, so the revenue is up. So real nice flow-through on the increased revenue from Q4, which we're very pleased with.

Our adjusted SG&A was down a little bit. That's mainly corporate costs, resulting in an adjusted operating income up about 220 basis points. And I want to highlight here that our first-half operating margin of 7.7% is a pretty good number. 7.5% to 8% is historically a pretty good number for us, so we're very pleased with a 7.7% operating margin. A number of details here about the other components that brings us down to our adjusted earnings per share from continued ops of $0.21.

Next slide. Go into a little more detail here on the balance sheet, starting in the upper-left corner of the slide. Balance sheet is in great shape. We did increase our net debt slightly, but our net debt to EBITDA ratio is still at 2.9 times. On the cash flow side, on the lower left, you can see that we do have a negative number in the cash from continuing ops. It does reflect a little bit of our seasonality as we come into a higher-volume half of the year.

I will also say here, though, that some of that decline in cash is due to some self-induced inefficiency that we're going to work on, moving forward. So, a better result there year-over-year, but something we still have some opportunity to work on.

The middle section here in CapEx. That's a big number, and it's bigger than I think our run rate is. The vast majority of that capital spending is the result of projects that were already in process from last year through the fourth quarter. So it's a bigger number than I think we're going to have at all, going forward; and that's all I'll say about that, for now.

Moving over to the right side here, working capital at about 9% of sales. I think that's a good reflection of where we are operationally. I think it's a decent number if you compared it to other companies, but I think there's also opportunity here for us to improve on that moving forward. So that's a good baseline, but I think we're going to operate in the mode of improving that as we move forward.

Next slide. Now I'm going to spend a little time going through each of the segments' results for the first quarter. Starting on the left side with material handling, sales were down 3%; on an organic basis, they were flat. We had some nice wins in our industrial businesses, both gaining share with some nice project wins, as well as increasing our channel coverage. And I think if you look at the industrial markets out there overall, we outperformed in the first quarter.

Similarly, we had some nice share gains in our vehicle segment, particularly in the auto business. We won a nice, large model launch at a major auto manufacturer. And that business has done quite well for us, so far, over the past few quarters.

In our food and beverage segment -- excuse me, in our food and beverage markets, as you know, a large component of that is the ag business. The volume was actually up in the first quarter. I don't believe that says anything about the year, other than it was some pent-up demand from last year not being as strong towards the end of the year. But it's a nice sign that we did have a good, steady pace of business through the fourth quarter. Volume up with the -- as we mentioned earlier, with the index pricing, some of our volume -- or revenue was down.

In Brazil, on both the auto and the beverage markets were down significantly, and that severely affected our business. I think -- go into a little more detail here on the impairment charges. Towards the end of the quarter, we heard from one of our large customers that their orders were going to be spotty throughout the year and that there wouldn't be any orders for a significant portion of the year. That triggered us looking at our goodwill, and resulted in the impairment.

Moving forward, as you may remember, we took some restructuring action in the fourth quarter. We thought that would be enough. As we look forward, we are looking at next steps to take here through the second quarter, and we will come back to you with more on that as we figure out what the best option for us is in Brazil.

On the margin side of the material handling business, the margins were up nicely as a result of both of the favorable input costs, but also from some nice work that we've done -- last year with some restructuring, but also factory efficiency throughout the organization, as well as some good work in product rationalization, picking the right products to sell at the right margins.

Moving over to the distribution business, sales were down 4%. The market indicators there would say that the market was maybe flat, may be slightly up in some cases. So, we feel that we are not doing as well there. A large part of that has to do with the salesforce initiative that we're working on right now. Again, as I said last quarter, this is the right initiative to do. It's the right strategy. But it's going to take a little bit of time, and our business is going to hurt a little bit from it on the way.

We did lose a few days of selling as we were implementing this in the first quarter, and we're hoping to continue to work through this for the rest of the year, and to this particular business turnaround.

On the good side, though, here on our Patch Rubber business, we did see a nice large win in the retread business there. And on the margin side, if you break the business out a little bit more, in more detail -- the distribution side, through a lot of the product rationalization and improvements we've made, did have decent margins through the quarter. But our Patch Rubber business had a very poor operational efficiency in the quarter in their factory, and that resulted in the reduction in operating margin.

Next slide. I'd like to finish here by talking about our 2016 outlook. The main message here is that our outlook hasn't changed. We're holding to what we said a couple of months ago. We're expecting our full-year revenue to be flat to down low-single-digits.

One thing I wanted to highlight in here is that the second quarter is a tougher comparison to second quarter of 2015. We had a very strong quarter last year in Brazil in the second quarter. And we also had a number of our ag customers ask to have orders delivered in the second quarter -- that was a little more seasonally higher than what we would normally see. So, we expect the second quarter to be down low- to mid-single-digits, but we're still holding our year to what we said before.

In the middle section here, you see our revenue and profit initiatives. Those haven't changed since last we spoke. And then at the bottom here, you see our capital allocation priorities -- again, none of which have changed since last quarter.

On the right side, I want to talk a little bit about our market-by-market growth outlook. In the consumer business, we're expecting that market to be slightly flat. And that's -- excuse me, slightly worse than what we said last quarter. And really what's happening there is we see that that market is starting up a little later in the season than what we're used to. And so we're thinking that that's going to be slightly worse than what we thought last time.

Our vehicle segment, we're going to hold where we said last time: up low-single-digits. In the food and beverage market, slightly worse, down mid-single-digits, and that's all due to the Brazil business. Our business here in North America is doing as we expected.

The industrial business we are expecting to be slightly better. And that's mainly due to some of the share gains and channel expansions that we've done here in the first quarter. That market itself is fairly choppy, with a number of the indicators going in a couple of different directions.

And, finally, in the auto aftermarket, we think that market is perhaps flat for the year; but, for our performance, we're expecting it to be slightly down. And that's again mainly due to our performance in initiating our new salesforce initiative.

That's all I have for my prepared remarks, and we'll be ready to take questions now.

(Operator Instructions). Chris Manuel, Wells Fargo Securities.

This is actually Gabe Hajde sitting in for Chris. A couple of questions for you. Dave, I think you talked about, of the 260 bps of margin improvement, about half of that was from favorable input costs versus selling price. I think that's about $2 million. Can you break out how much of that might be sustainable, or what's driving that? Is that just a disconnect, or a lag effect from falling resin versus selling price? And maybe what product lines and/or division that mostly falls in?

Sure. I'm not going to go into detail on which businesses this affects. I think we've stated in the past that our index is about 18% to 25% of our total spend. So, really, what we're seeing there -- I'll give you my view of the PE market and the PP market. I think the first-quarter year-over-year was favorable. I think from a sequential standpoint it got a little worse, but then that sort of balanced out here as we've moved on into the second quarter. In terms of the PP market, I think that the prices are up slightly. That's not as much of a portion of our business. We have about 20% of our business is in polypropylene.

We expect that to be slightly worse, going forward, as we look at the market. There's some opportunity there for some more capacity to come online. But generally speaking, the PE market, we expect to be able to continue to have favorable pricing through the year. PP is a little more questionable.

Okay. To summarize, would you expect to have to give some of that back? Or you just -- you are expecting kind of a neutral price/cost relationship for the rest of the year, such that the other 130 basis points of margin improvement is sustainable?

I see what your question is. Yes, I think so. I think the operational improvements we've made are permanent ones, and I think we should be able to sustain those.

All right. Can you update us in terms of a CFO search, and maybe your thoughts around timing?

Sure. I don't have any specific timing for you, but the process is definitely on track to where we thought it would be. And I will also say that we've got a great team here, particularly with Kevin and Monica that are holding the fort down. So, it's going as we expected it to, and we will keep you updated as we move forward.

Okay, that's helpful. And then, Dave, with respect to the working capital initiatives that you spoke of, I think 9% to revenue, and maybe some selective opportunities -- do you know what components you are looking at, and how maybe we can quantify it? Are we talking about maybe 50 to 100 basis points of opportunity over the next two years?

I'm not going to quantify it, but I think all of the elements are areas that we're focused on. And it depends on which P&L you talking about. So, some of the businesses still have some inventory opportunities. And that's either driven because of their operational inefficiencies, or because of just how they have operated regarding inventory in the past. I think there's also opportunity for us to put permanent fixes in place, if you will, on terms with our customers and with our suppliers. And we're working with those, ongoing.

I think we've got some one-time benefits that have shown up in the past, and that's made are working capital a bit choppy. I'd like to see it be a little smoother so that you can see what the real run rate is, and then improve off of that. It's easier to improve off of a steadier platform, so that's what we're shooting for at this year. And then that will make fairly obvious where the opportunities are to improve.

Okay. And one last one for us. In the distribution business, it sounds like there's some sales initiatives going on. Do you know about how long that may take to come to fruition for you, in terms of whether it's top-line growth and/or margin improvement in that business?

Sure. Well, I think we're going to be able to capture some of each as we go, because this is a full, comprehensive initiative here. If it was one element of the commercial process, I would say -- be able to give you a shorter timeline and a more definitive expectation in terms of improvement. But there are a lot of different elements to what we're trying to change within the organization there. And so, it's going to take the better part of a year here, and we will see slight improvements as we go and implement each part.

But as you are making changes like this, as you turn the page on one change, if you face roadblocks in the other parts of the changes that you're going to do. In order to make a salesforce more efficient, there's not just one thing you have to do. There are a number of things that we need to do to support our team in the field much better.

I did spend a couple of days, in the first quarter, out in the field with some of our sales team, and I learned a ton from that. We have some great people out there. There are a lot of things we need to do to help them be better and more effective at their job. Some of them are easy; some of them aren't.

All right. Thank you.

Adam Josephson, KeyBanc Capital Markets.

Dave, just one clarification on the resin question that Gabe asked. Your EBIT was up $3 million, adjusted EBIT. How much of that was resin?

About half of the improvement was from resin.

Okay. And then in terms of your full-year sales outlook, I know you talked about consumer being a bit worse because of a later start. I was hoping that you could elaborate on that. Food and beverage being worse because of Brazil; I know you have a couple businesses in Brazil, so I just was hoping you could talk about the state of your different businesses there, obviously that would've precipitated the write-down.

And then you talked about your industrial outlook being better on account of share gains. But it sounds like you are saying the market as a whole has not improved over the past three months. Can you elaborate on all those issues, if you don't mind?

Sure. Sorry, Adam. Tell me what the first market question you had was again?

Sure. Yes, consumer. You said it is starting a little later than what you're used to.

Sure. So, a couple things at play. I'll go through them in order here, start with the consumer. A couple things at play here. I don't think we did ourselves any favors by launching our new product late. We've got what I think is one of our better products out in the field now. But as you can imagine, any new product doesn't take off immediately. So there's a little bit of a lag there. But also we saw some choppiness within the first quarter, particularly at the big boxes in terms of their point-of-sale data. And so, it's just been a little bit slower.

It's not -- nothing that I'm terribly worried about. Year-over-year we are fine; it's just it's a little slower than what we were expecting for the year. And that could be driven a little bit by the weather. It could be driven a little bit just by how the big boxes are planning their inventory right now. But our point-of-sale data would indicate that we're kind of in a good place with them in terms of managing inventory. So I think it's just end markets.

And I think if you look at some of the -- maybe some of the turf companies out there that are selling lawnmowers and that kind of stuff, they are not seeing huge growth right away early in the year, either.

So, we'll see how the second quarter plays out. It is a very short-term horizon that we have within that business. But so far, it's steady, but not up. It's just a change from what we had said a couple of months ago.

Right.

So, in Brazil, the automotive markets down there are down significantly, and that affects our business. The bigger portion of our business is in beverage, and that is down significantly. Part of that is there's some M&A going on that's clouded the picture from last year, but it's also the market itself. The people are just not spending capital down there right now. Could that improve as the government stabilizes? Perhaps, but we are not expecting to have a great year in Brazil. And so we're looking at the different steps we need to take to make sure that we're prepared for that. And we're looking at a bunch of different options as to what we can do there. And once we are ready to roll that out, we will let you know.

Just a couple [comprehensions]. On the Brazil, the consumer [piece], you are talking returnable bottles, specifically beer?

Correct.

And so, your customers are not replacing their float to the extent they have historically?

That's correct. And what is clear is that they have told us they are not buying. What's unclear -- and it seems as though the market's following that. The market indicators we see are that the market itself is down in a similar fashion. But at some point, they are going to run out of crates; they're going to have to order something, and so it's unclear when and at what volume. We have reduced our expectations significantly, based on the information we have today.

Right. And before I get to the industrial piece, the beer production data in Brazil has fluctuated wildly. Year-to-date it was down, I think 18% in March. It was up 10% in April. Do you have any sense as to what the underlying trends are? Because the production data has been just all over the map.

Yes, I think the underlying trends are there there's a bias to saving cash, and so we are considered a capital spend as part of what we're doing. So they are trying to just use what they have, longer. Now, there may also be a glut of inventory out there from -- for various reasons; I don't know that for a fact, but that could be a contributor. But I think it's just a clamp-down on spending, but I don't know that there's going to be some sort of rebound of pent-up demand down the road. So it's just (multiple speakers) they are using what they have for longer.

And just a couple of others, Dave, just on industrial. You have a slightly better outlook, not because of the broader market, but because of your share gains and channel expansions. The data, the broader data, has been up and down. How would you characterize the US industrial market, at this point?

Yes, up and down is the best way to describe it. So you look at things like industrial production, capacity utilization -- those things are flat. You look at new orders, and those are positive, and that's good. I like to see that. Inventories are still high, but coming down, perhaps. But then look at other -- I look at things like automation industry as a bellwether, leading indicator, and their results in the first quarter weren't great. So, capital spending seems to be lower, but then demand maybe is picking back up. Those are the mixed signals we're looking at, so we're cautious there.

I think that there's opportunities for us, and I'm excited about those. And so we're going to focus on where we have opportunities to win and increase our channel coverage. And that will hopefully be buoyed by a market that comes back. But I don't think there's anything solid that would tell you the market is going up. And then of course, last week, we get pretty bad first-quarter GDP numbers. Not that I just look at that alone, but that's not a great number either.

Right, right. And just one clarification on the consumer piece, Dave. So you've mentioned that the big-box retailers have not been ordering up to their usual standard. The weather seemed pretty great in the first quarter, awfully --unusually mild. So, is there any reason why the weather would have been problematic from the perspective of your consumer business or the broader market?

It's tough to say. I'm always hesitant to talk about weather being -- because A, it's something we can't control; and B, you could always find an argument for weather on one side of the other. But I think that the good side of the weather being warmer is that the housing market had some new building going on. And we would think that housing starts is a good indicator for us.

But for whatever reason, our -- and we have this -- we see data from our end retail outlets. We see what their point of sale data is, and it's very tepid. I don't have a (technical difficulty) answer for you on that, Adam, but that's (multiple speakers).

Sure. No, I appreciate it, Dave. Then just one last one about the results compared to your expectations. Sales obviously in line, margins were higher. Was there something that particularly surprised to the upside on the quarter, be it either your productivity or the resin benefits that you experienced?

Well, to be fair, I think that our expectations -- that the results were right in line with our internal expectations. So, I didn't see any surprises, no. We came in right where we thought we'd be.

Got it. Thanks, Dave, and best of luck.

(Operator Instructions). Matthew Paige, Gabelli & Company.

I was wondering if you could provide a little color on the new sales team initiative and how that impacted sales in the distribution segment, at least, during the quarter.

Sure. Thanks. I think the couple key things on that is as you are rolling something like this out, there's training required; there's -- and that's going to take you away from selling for a couple of days. So you start right there, we're in the whole, because you can't get those days back. But I'll also say that we've had some turnover, and some of that is a good thing, and some of that is going to continue to happen when you have a change like this. And that's also affecting our selling days out there.

So it's primarily selling days. When you think about changing the mindset and implementing new tools for a team, there's training involved in that. And that slows you down and keeps you from doing the key thing that we want our salespeople doing, which is being out there and selling.

And when I talk about training, I'm talking about targeting new types of customers, selling new kinds of products, and then training in more efficient ways of managing time. And they have a short-term negative impact because, again, to train someone you have to take them away from what they're doing. But then long-term, it makes them more efficient. And the idea there is that we're going to have more time selling, which is what we want.

Got it. And then you saw solid margin gains on the material handling side. What levers do you have left to pull on the distribution side of the business to keep improving profitability there?

So, there's a product mix. A good strategy focuses on what products are not only serving your customer best, but also serving your internal piece best. So, a lot of what you see -- and again, I think the top-level distribution margin decline in the first quarter was -- didn't reflect what I'd say are solid gains that we're making in that arena with the distribution portion of the business. We just had a bad, inefficient quarter at our Patch Rubber business, and that really dragged margins down.

So, all in all, if you continue to improve what you are offering to the customer in terms of products, but also services and how you are selling to them, you are going to see margin lift there. So, that's our goal with that business. And so it is part of this salesforce initiative -- a big part of it is targeting the right customers and targeting the right products to be selling to those customers.

Yes, and I appreciate (multiple speakers).

If I'm -- starting to add one more piece. Some of that is what we're not going to sell. One of the things they'll say is that a lot of businesses like this have been doing some of the same things for a long time, and it's hard to change those habits. I understand that. But sometimes we're not selling the right products with enough emphasis, and some products we probably shouldn't be selling. So, we're going through all that right now.

All right. Thanks for taking my questions, and good luck.

Thank you. Ms. Vinay, there are no further questions at this time.

I'd like to turn the floor back to you for any final remarks.

Thank you. We think 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 immediately be available via webcast or call. Details can be found on our website at www.myersindustries.com. Thanks and have a great day.