Myers Industries, Inc. (MYE) Q1 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the Myers Industries 2014 First Quarter Earnings call. [Operator Instructions] It is now my pleasure to introduce your host, Monica Vinay, Vice President of Investor Relations and Treasurer. Thank you. You may begin.

Thank you, Danielle. Good morning. Welcome to Myers Industries' first quarter 2014 earnings conference call. 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; Chris Koscho, Vice President and General Manager, Lawn & Garden Segment; and Todd Smith, Vice President and General Manager, Distribution Segment. Earlier this morning, we issued a news release outlining the financial results for the first 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 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 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 and good morning. Gregg and I will discuss first quarter results and expectations for our second quarter and 2014. Then we'll open it up for questions. Unfortunately, extremely poor weather conditions and transportation issues negatively impacted net sales during the first quarter by approximately $9.6 million and resulted in a decrease in net income of approximately $2.5 million or $0.07 per share. Now for more details, let's start with Slide 3 of the presentation. Net sales in the first quarter of 2014 decreased 2.9% to $208.8 million compared to $215 million in the first quarter of 2013. Sales increased nicely in the Material Handling segment later in the quarter, but, unfortunately, that increase was offset by decreased sales in each of our other segments. Adjusted gross profit margin was 26.8% in the first quarter compared to 27.2% in the first quarter of 2013. The decrease in sales volume led to the slightly lower gross profit margin as compared to the first quarter of last year. The gross profit margin, as adjusted, was calculated using gross profit dollars that excluded special pretax items of $5.9 million for the first quarter of 2014 and $200,000 for the first quarter of 2013. Details of these special items can be found on the reconciliation of non-GAAP financial measures included on Slide 11 of the presentation and in the earnings release issued earlier this morning. Reported net income for the quarter was $700,000, or $0.02 per diluted share, compared to net income of $7.9 million, or $0.23 per diluted share, in the first quarter of 2013. On an adjusted basis, which excludes restructuring costs and other special items, our earnings per diluted share in the first quarter were $0.16 compared to $0.24 in the first quarter of 2013. Although our Material Handling segment performed comparatively well during the quarter, the remainder of our businesses impacted by harsh weather conditions and transportation issues negatively impacted operating performance during the quarter. Some inefficiencies in Phase 2 of our Lawn & Garden segment's restructuring project, including overhead redundancies and machine start-up challenges, additionally impacted sales volumes and operating results during the quarter. Any savings that were realized from phases 1 and 2 of the segment's restructuring project were more than offset by these issues. As I will discuss later, despite a slow start impacted by extreme weather, we believe Myers is still positioned to have a good year in 2014. I would now like to turn the call over to Gregg Branning, our Chief Financial Officer, who will provide you with the details regarding our financial results. Gregg?

Thank you, John. Good morning. I will comment first on the overall financial results, which are summarized on Slide 3 of the presentation, then I will review the results by business segment. I will review the items on Slide 3 that John hasn't already discussed. And SG&A expenses in the first quarter of 2014 were $47.4 million compared to $45.1 million in the first quarter of 2013. The increased year-over-year was driven by $1.5 million in higher freight and logistics costs to secure transportation and ship products in a very tight marketplace and $1 million of higher restructuring and other related items, resulting primarily from the restructuring initiatives in the Lawn & Garden segment and the closure of the Canadian branches in the Distribution segment. Our effective tax rate during the quarter was 35.9%. We anticipate that the effective rate for the full year 2014 will be 36%. Now if you would, please turn to Slide 4 of the presentation. Cash flow used for operations for the 3 months ended March 31, 2014, was $60.7 million compared to $6.5 million during the first quarter of 2013 due mainly to an increase in working capital. While there typically is a seasonal increase in working capital during the first quarter, this year's increase was larger than normal as we leveraged our balance sheet in an effort to counterbalance a number of items. We took advantage of early payment discounts and decreased our accounts payable balances. Additionally, inventory balances rose more than normal due to multiple factors, including the transportation issues, a system implementation in our Material Handling segment and the rationalization plans in our Lawn & Garden and Distribution segments. We anticipate that the full year cash flow from operations will be in the range of $60 million to $70 million. During the first quarter of 2014, we announced the board's approval of a $40 million share repurchase authorization with expectations that it will be completed in 2014. In the first quarter, the company invested $5.1 million to repurchase approximately 262,000 shares of our common stock. In February, we also announced the increased dividend of $0.13, representing a 44% increase compared to the $0.09 per share paid the prior quarter. Capital expenditures totaled $4.7 million for the 3 months ended March 31, 2014. We estimate that capital expenditures in 2014 will be approximately $35 million to $40 million and more than 65% of that will be for growth and productivity projects. Although we leverage our balance sheet some in the first quarter, we continue to maintain a strong balance sheet, which is reflected in our low net debt-to-total capital ratio of 32.7%. We continue to evaluate acquisition opportunities that can provide returns at a higher level than our cost of capital. This is an ongoing process within the company, and we remain diligent in our focus that expansion opportunities must meet accretion and overall return objectives. The combination of continued investment in business development and new products, along with the 2014 share repurchase plan and increased dividend, reflects our confidence in the ability of the company to generate free cash flow to maintain a balanced approach to capital allocation in 2014 and beyond. 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 2013, and 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 in the first quarter increased 13% to $90.6 million compared to $80 million for the first quarter of 2013. Strong sales in the food processing and agricultural end markets led to the increase year-over-year. And adjusted income before taxes in the Material Handling segment was $10.9 million for the first quarter of 2014 compared to $9.9 million in the first quarter of 2013. Compared to last year's first quarter, improved income from higher sales volume was partially offset by a less favorable sales mix. Net sales in the first quarter in the Lawn & Garden segment were $49.8 million compared to $60.4 million in the first quarter of 2013. Adjusted loss before taxes in the Lawn & Garden segment was $100,000 in the first quarter of 2014 compared to adjusted income of $2.7 million in the first quarter of 2013. Again, poor weather conditions and transportation issues severely impacted the segment sales and operations and contributed to start-up inefficiencies in Phase 2 of the segment's restructuring project, which further impacted their results. Net sales in the Distribution segment were $39.7 million in the first quarter of 2014 compared to $42.6 million in the first quarter of 2013. The sales decline compared to last year was the result of harsh weather conditions and the closure of the segment's Canadian branches, which took place in the first quarter of 2014. Adjusted income before taxes in the Distribution segment was $2.9 million in the first quarter of 2014 and the same in the first quarter of 2013. A more favorable product mix offset the impact of lower sales in the Distribution segment. Net sales in the Engineered Products segment were $32.7 million in the first quarter of 2014 compared to $37 million in the first quarter of 2013. Lower year-over-year sales volumes in the custom and transplant auto markets were partially offset by ongoing strength in the RV and marine markets. Adjusted income before taxes in the Engineered Products segment was $3.8 million in the first quarter of 2014 compared to $5.1 million in the first quarter of 2013 driven by the lower sales year-over-year. This concludes the financial review, and I'll now turn the call back over to John for some summary and outlook remarks. Thank you. John?

Thanks, Gregg. Please turn to Slide 9 of the presentation. Although severe winter weather and transportation issues we discussed earlier significantly impacted our results during the first quarter, particularly in January and February, we were encouraged by our performance in March and the progress that we have made in our Lawn & Garden segment's restructuring, which is still on track to generate total annual savings of $13 million. We continue to anticipate that the company's full year results will show another year of improved earnings. We anticipate year-over-year earnings growth in the second quarter. As compared to last year in the second quarter, we foresee the following: in our Material Handling segment, we expect increased sales driven by organic growth in Brazil and continued strong agricultural sales; in our Lawn & Garden segment, we anticipate that sales could be slightly higher compared to last year due to a potential delay in the season resulting from poor weather conditions during the first quarter; in our Distribution segment, we anticipate that sales increases from organic growth, including new service introductions, will be offset by sales decreases resulting from the closure of our Canadian branches; in our Engineered Products segment, we expect that sales will continue to benefit from ongoing strength in the RV and marine markets. Finally, I would again like to reiterate we had -- we certainly had issues in January and February, but we saw strength in March. And for the year, expect our results to be better than last year. That concludes management's presentation. I'd like to turn it back over to Monica so that we can take your questions.

Think 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 Gregg, the following segment vice presidents and general managers are also available to answer questions: Joel Grant from the Material Handling segment, Chris Koscho from the Lawn & Garden segment and Todd Smith from the Distribution segment. Go ahead, Danielle.

[Operator Instructions] Our first question comes from Chris Manuel with Wells Fargo.

A couple of questions. First, let me start with Mr. Branning. I had a question regarding working capital. So I understand you mentioned that there were some timing issues with respect to some -- you opted to do some -- buy some things in advance and such to secure some discounts. As you look through the full year, though, kind of as things ebb and as they flow, would you anticipate that -- call it days payable, days receivable, the cash conversion cycle, if you will -- stays roughly flat over the course of the year, or working capital essentially then just a very, very modest source of cash from higher sales kind of is where I'm going? Or is there something else maybe that's happening? I mean, you had quite a big pool in 4Q. Does some of that maybe prove onetime or maybe a little color there?

Sure, Chris, thanks. What I would say is that as we talked before, we expect our operating cash flow to be between $60 million and $70 million. Our days payable, we expect to be similar to where we were at the end of last year. And so, we certainly do not expect any huge improvement that we saw last year in working capital. But instead, we expect the DPO, the inventory turns and receivable days to be pretty much consistent year-over-year. And so, we expect to continue to have a good operating cash flow this year.

Okay. Well, maybe let me -- can I ask the question just from a little different angle? If I look at what you did last year in free cash flow, your operating cash flow was a little bit above $96 million. And granted, $33 million of that was in working capital improvement, but that really comes back to an up cash flow that was about $63 million then extra working capital. And I believe that we've communicated different things in the past was that you had a very -- even today is that you intend to have up earnings. I think DNA is a touch lower. What are the other potential factors then that could in fact either make operating cash flow just be a touch better or even potentially worse to kind of fit in with your guidance?

Well, again, if our guidance is between $60 million and $70 million, which, obviously, $63 million last year was -- would be in the middle of that, we would expect to continue to work hard on pulling down our inventory days as we increase our business. That should drive payables up without obviously driving the days up. And -- but that will also, in turn, to -- drive our receivables up depending on timing. So we're comfortable in that $60 million to $70 million range, which would be consistent with last year outside of the onetime benefit of payables increase.

Chris, this is John. I think we were able to take advantage in the first quarter of some good buys on paying early on Resonance [ph] on. So as we fill silos and railcars, as we start to work that down during the rest of the year, and taking advantage of lower cost material, that inventory also will begin to work down. I think you'll see that in the numbers as well.

Great. Okay. A couple of other questions. I always like to ask, if you don't mind, how the business had to kind of run through, what they saw through the quarter the -- their volume trajectories? And maybe, given we had kind of some unusual weather this quarter, if maybe you can give some perspective as to portions of demand felt were lost, portions that may be made up over the balance of the year, respecting that some things may be, some things may not be improved upon, et cetera, or recovered?

Sure. Why don't we start with Joel Grant on Material Handling and we'll just kind of go around the horn then?

Well, first in regard to the first quarter, as the comments have already been made, the agricultural and the food processing were very good in the quarter. And there, the weather indications were in January and early February, we have 4 of our 5 plants, Grim and Great Lakes in -- certainly in or off the snowbelts. So we did lose some time there. In some cases, we're not 24/7, and we can make that up. There are a couple of lines that are 24/7 and almost in a sold-out position. So those we weren't able to make up in the quarter, but we do expect to make them up in the second quarter as we go into the latter part of the year. Q2, we're looking for growth over last year. Kind of our plan, probably single digit, low single-digit growth, in Q2, and we do expect to meet our projections for the year and keep evolving [ph] the product.

This is Chris Koscho. For the Lawn & Garden segment, obviously we had some volume challenges, as we depicted earlier in the presentation. The largest contributor to that volume for us was the weather and kind of the logistics challenges. As we look at the industry through the first quarter, it's been a very challenging industry for the Lawn & Garden segment. Our growers have been very challenged through the first quarter. The weather has really impacted our customer base really throughout the country with the exception of the West Coast. The West Coast for us has been really the only normal season we've seen throughout the country. So as we look at the first quarter, certainly significantly challenged by the weather, the industry. We're cautiously optimistic that there is some potential for recovery in the second quarter. The challenge that we see is the season is very compressed as we go into the second quarter. Instead of a 2- or 3-month-long season, we're now looking at 6-week season. And at the end of the day, that's going to determine really our ability to recover any of the first quarter challenges as we kind of move into second and third quarter.

This is Todd Smith from Distribution. With regards for the first quarter, I guess couple of things. We are -- we heavily rely on our sales representatives, our sales resources to get to multiple customers. And so, we had several situations that we were impacted and basically our sales reps were not able to get out. And also, we had several situations where we just had customers close down sometimes for multiple days. So obviously, those 2 things impacted our volume in the first quarter. Now with that said, when we look at our indicators on replacement tire shipments, we do see single-digit increases in replacement tire shipments and expect a slight increase in that for the full year. So with that said, we're optimistic that there's pent-up demand from the severe weather that will benefit us in the future quarters. I'd also like to point out that we recently launched a vending machine program. And with that program, we're able to offer our customers a strong and improved inventory management system as well as point-of-sale data. And so we're encouraged with the market reaction from that and see that there could benefits in the year for that for us. So as we look at the full year, we're optimistic in Distribution about the year.

And Chris, from an Engineered Products standpoint, I'll cover that, most -- all of our plants -- in fact, all of our plants in Engineered Products at one time or another were closed during the first quarter due to weather as well as customers. We see strength going forward in automotive parts as that particular customer is coming back very strong. It's -- with respects to special products, we see there also a major customer that did very little in the first quarter but has become turned on in the second quarter. So expectation for Engineered Products is still very bullish for the year. Let me just kind of wrap up this whole weather thing. I think one of the problems that Myers Industries has is that we're obviously by far the smallest packaging company in our peer group by billions of dollars. So whereas our peers, who also experienced weather problems have a significant number of more facilities not only in United States but also around the world to help overall overcome that, we're pretty much restricted to where 80% of our plants are in Ohio, Indiana, Michigan and Illinois, and we all know what's happened -- what happened to those facilities during January and February, primarily -- especially also our customers in those areas. I think we took a bigger hit, probably a bigger percentage than most of our peers have. But again, our outlook for the whole year is to be better than the previous year. So we're taking a hit from weather. We understand that. But I think that should be in the rearview mirror as far as investors look at Myers Industries.

Our next question comes from Christopher Butler with Sidoti & Company.

I was hoping you might be able to speak to the strength in Materials Handling. If I remember, last quarter, as we discussed this segment, you had good sales in 2013, but it was good sales from some lower product mix, products and that as we move into 2014, we were going to see a bit -- a little bit less of that and a little bit more of the higher margin products. It didn't seem like that took place here in the quarter. Could you speak to that and the strength?

Okay, Chris, this is Joel Grant. I would say that we had a good quarter from a couple of the major segments. Again, in this segment, you've got multiple companies that bridge multiple markets. And in the Material Handling, when people introduce a new program, when people introduce a new bottle or introduce a new crate, those all -- the timing of which can be anytime during the year. We were affected by some of the weather, as we previously noted. Gregg mentioned we had some IT expense during the quarter as we had implemented 2 systems, at Akro-Mils and at Buckhorn. And beyond that, within either the food processing and the agricultural groups, there were some customer mix issues that affected that. So those are the things that all go up into the quarter-over-quarter margin for that segment.

And switching gears to Lawn & Garden, could you speak to the challenges that you had faced with the restructuring and whether there's any hangover on that into the second quarter?

Yes, Chris, this is Chris Koscho. As we mentioned in the February call, we did face some start-up challenges, some inefficiencies, some additional costs. We noted an additional cost of about $5 million to install and complete the project. The biggest real -- the biggest challenge as we looked at the scope of this project, we moved approximately 60 machines. And as part of that move, it really required a depth of talent and expertise as we started up these machines. So we -- as we closed the Waco facility and closed the Canadian facility, we have seen that cost savings begin to flow through the business. But as we mentioned earlier, it was more than offset with the inefficiencies and the start-up costs that were required. At this point, we see that those start-up challenges is really in the rearview mirror. 90% of the start-up and implementation is complete. We will see some additional cost into the second quarter, which is mainly related to the inventory. As we flow inventory through our business, we'll see those costs manifest themselves in the second quarter. So at the end of the day, the challenges that we talked about in February and that we now report in the first quarter are really behind us. As we move into the next phase for us through the project, it's really about harvesting those cost savings, pulling out that additional cost and really maximizing the efficiencies of the operations. All machines, all equipment are up and producing, performing. And it's really now about continuous improvement and what we call ops excellence in the business.

And with the closures in Canada, the effect on your sales, has that occurred about as expected with the decrease that you're seeing from that?

Chris, I assume you're referring to Lawn & Garden and not the Distribution segment?

Yes, I'm sorry, Lawn & Garden. Oh, I'm sorry. Yes, the -- I'm sorry, let me correct that. On the Distribution segment, with the closed plants in Canada, you are looking for some lost sales because of that. Could we -- is that occurring as expected?

Yes, this is Todd Smith for the Distribution segment. The sales impact for the Canadian exit was approximately $1 million with minimal EBIT impact.

And Chris, this is Gregg Branning. I would -- to answer your question, I would say that, that $1 million sales impact was in line with what we expected.

Yes.

And just finally, the repurchases in the quarter, a little slower than a $40 million run rate for the year. Is that just because of the timing of cash flows with the quarter and we'll expect that to ramp up?

Yes. Yes, I would say timing, and we will see that ramp up.

Our next question comes from Chris Manuel with Wells Fargo Securities.

I had just one follow-up question with LNG and then -- to kind of close a loop here. And then I had 2 other basic questions. But first, with the LNG stuff, I think with savings and with different improvements and things, you were targeting something that was in the, call it, low to mid-teens this year as an opportunity, I think, on the EBIT side. Is that -- given maybe some of the setbacks here in 1Q and some timing issues or seasons lost or compressed, et cetera, is that still a reasonable target that we should be thinking about?

Yes, Chris, this is Chris Koscho. And as we announced earlier, we expect to harvest $5 million of EBIT income improvement from Phase 1, an additional $8 million from our Phase 2. And we're very comfortable and confident that those numbers, although delayed, are still achievable. We are starting to see those cost improvements flow through by the closure of the facilities, the leveraging of the overhead in the Middlefield site. So we're very comfortable. And those -- that $13 million is definitely achievable. We expect to see the flow to the bottom line really start in the third quarter as we turn through the inventory and move into really the next season in the third quarter. So yes, very comfortable with the $13 million. Quite frankly, we're seeing that flow as we speak right now. It's just -- had been offset in the first quarter with the inefficiencies and some of the start-up costs we incurred as we moved this number of machines.

Chris, this is Gregg. Also just as a follow-on to that, as Chris Koscho mentioned, we'll see that savings begin now, and so it'll actually hit our bottom line, if you will in Q3. So it'll be from Q3 to Q2 of next year. So you won't see the full $13 million this year, but we are fully on track for the $13 million over a 12-month period beginning in Q3.

Okay, that's helpful. Another question I had or 2 questions were the new product funnel. Could you maybe give us just a quick update or any guidance on each quarter, where are you at or a kind of pace you get so far? Are you still comfortable with getting towards the targets you've laid out?

Yes, Chris, this is John. We're on target. We've got 15 new products that are -- that we've introduced. And we expect to be at our target level for this year, about 7%. Or was that -- actually, in the first quarter, it was about 7% of the total sales were due to new products. And a full 4-year forecast is -- I think is around 9% and -- yes, about 9%.

Okay. And then last question I had was, I know you committed or talked about doing $40 million worth of repurchase this year. And the stock has had a really nice run so far year-to-date. I know it's under a little pressure today, but has anything maybe changed with how you think about that or view that? Is that similar to what you're anticipating doing? How do you balance?

Yes, the board has authorized and expects us to buy back $40 million worth of shares this year, and that's still the plan to do that.

Our next question comes from Adam Josephson with KeyBanc Capital Markets.

Sorry, just I joined a bit late. John, Chris just stole my thunder a bit. But is that $40 million at all contingent upon the stock price? Or, I mean, irrespective of what happened to the stock price, are you going to spend that $40 million?

I'm going to let Gregg handle that one.

This is Gregg. I would say yes, it is contingent on price. But as John mentioned, we fully expect to buy the $40 million this year. That's been the -- what the board expects, and we will do that. And there -- the stock price definitely affects it, but we don't see that stopping us from buying $40 million at this point.

$40 million.

Right. Thank you, John.

Thank you. At this time, I'd like to turn the floor back over to Monica Vinay.

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

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. We thank you all for your participation.