Myers Industries, Inc. (MYE) Q4 2014 Earnings Report, Transcript and Summary

Greetings and welcome to the Myers Industries fourth quarter and fiscal year 2014 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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 and welcome to the Myers Industries’ fourth quarter and full year 2014 earnings conference call. I’m 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, Distributions segment; and Mike Valentino, Vice President and General Manager of Myers do Brasil, Novel, Scepter and Ameri-Kart. We’d like to introduce and welcome Mike whose extensive experience driving new product development and improving operational performance will be instrumental in executing our growth strategy in Material Handling. Earlier this morning we issued a news release outlining the financial results for the fourth quarter and full year 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.

Thank you and good morning. 2014 was a year of board approved planned strategic change for the company. We reduced our operating segments from four to two and have transformed Myers into a more focused company. With this strategy, we believe we have the capability to grow faster, increase profits, generate additional cash and most importantly, become a more valuable company to all of our stakeholders. The fourth quarter of 2014 as anticipated, had increased sales versus the fourth quarter of 2013. However, earnings were impacted by the same factors that we saw during the third quarter of 2014. Our recent acquisition of Scepter performed on plan. However, some of the other businesses in the Material Handling segment continued to see decreased demand in the agriculture and food processing end markets. Purchases of some of the segment’s agricultural storage containers have remained soft due to weak commodity prices and orders of some of the segment’s liquid storage containers have been delayed as a result of a recent acquisition of a major customer. The Brazilian economic situation also continues to be somewhat problematic. We were able to offset a portion of these impacts through a number of actions that we have taken, which include cost reductions, pricing adjustments and increased production in sales for some of our legacy Material Handling products. Despite a difficult operating environment in 2014, we were successful in executing on a number of our strategic goals during the year. Please go to slide 3 of the presentation. We generated $28 million of free cash flow in 2014. We increased the dividend by 44% to $0.52 and repurchased 2.7 million shares of our common stock, returning a total of $70.6 million to shareholders. We competed the sale of WEK Industries, a non-core business in June of 2014 for $20 million and used the proceeds to help fund the acquisition of Scepter, which was completed the following month in July of 2014. Scepter has expanded our Material Handling business into new geographies, presented new and enhanced product offerings and is already providing us with opportunities to expand our customer base through a number of cross-selling opportunities, such as selling Scepter products to customers in the Distribution segment. Finally, in February of this year, we completed the previously announced sale of the Lawn and Garden business for $110 million. The net proceeds from the transaction were used to immediately pay down debt. And now I’d like to turn the call over to Gregg Branning, our Chief Financial Officer who will provide you with the details regarding our financial results. Greg?

Thanks, John. Please turn to slide four of the presentation so that we can review our financial results for the quarter. Net sales from continuing operations in the fourth quarter of 2014 increased 9.4% to $158.3 million compared to $144.7 million in the fourth quarter of 2013. Incremental sales from the Scepter acquisition led to the increase in sales year over year. If you exclude Scepter, sales declined year over year in both the Material Handling and Distribution segments. Gross profit margin from continuing operations was 24.7% in the fourth quarter of 2014 compared to 27.6% in the fourth quarter of 2013. The decrease in gross margin compared to the same period last year was due mostly to lower sales volumes in our legacy Material Handling businesses and in Distribution and a change in the mix of products sold year-over-year, which I will discuss more fully when I review the segment results. Reported income from continuing operations for the fourth quarter was $3.8 million or $0.12 per diluted share compared to $6.4 million or $0.19 per diluted share in the fourth 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 fourth quarter 2014 were $0.13 compared to $0.15 in the fourth quarter of 2013. Selling, general and administrative expenses for continuing operations in the fourth quarter of 2014 were $31.5 million, compared to $30.6 million in the fourth quarter of 2013. Incremental expenses due to the Scepter acquisition were mostly offset by decreases in salaries and employee related expenses, selling expenses and Information Technology expenditures. Our effective tax rate was 24% for the fourth quarter of 2014 and 32% for the full year of 2014. The full year rate was lower than the previously estimated rate of 37% due to some discreet tax benefits we were able to obtain. We anticipate that the effective rate for the full year 2015 will be approximately 32.5% as we see a shift to more international earnings with the Scepter acquisition. Now please turn to slide five of the presentation. Cash flow provided by continuing operations for the 12 months ended December 31, 2014 was $52.1 million compared to cash flow provided by continuing operations of $74.9 million for the same period in 2013, due mostly to lower earnings and also because of a one-time benefit we realized in 2013 as a result of a change to our accounts payable terms. Capital expenditures for continuing operations totaled $24.2 million for the 12 months ended December 31, 2014. We estimate that capital expenditures for continuing operations in 2015 will be approximately $25 million to $30 million as we will have Scepter for a full year. During the fourth quarter we repurchased $6.6 million of our common stock and for the 12 months ended December 31, 2014, we repurchased $54.9 million of our common stock. When combined with our dividend commitment, we returned almost $71 million to shareholders during 2014. As has been our approach, management and the Board will continuously review the opportunity to buy back shares relative to investments in the strategic growth of the company. Now let’s turn to our business segments and their performance as summarized on slide six and seven of the presentation. Results are compared to the same period in 2013. I’ll be referencing the adjusted pretax 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 fourth quarter of 2014 increased 15.1% to $110.1 million compared to $95.6 million in the fourth quarter of 2013. Incremental sales from the acquisition of Scepter were offset by sales declines versus last year in the agricultural end market as low corn and soybean crop prices continued to depress sales of the segment’s agricultural storage boxes. Additionally, orders have been and continue to be delayed in the food processing end markets through the acquisition of a major customer, which has led to a decline in sales of the segment’s liquid storage containers as compared to last year. Adjusted income before taxes in the Material Handling segment was $11.5 million for the fourth quarter of 2014 compared to $10.5 million for the fourth quarter of 2013. Although adjusted income before taxes increased year over year, it was adversely impacted by the decreased sales of the agricultural and food processing products and the resulting change in product mix. We were able to partially offset the impact for the change in product mix through continued efforts and reduced labor hours, overhead costs and Selling, General & Administrative expenses. Net sales in the distribution segment were $48.3 million in the fourth quarter of 2014, compared to $49.2 million in the fourth quarter of 2013. While sales of supplies and equipment in the US increased year-over-year, those increases were more than offset by a decrease in custom sales and lower Canadian sales during the quarter, due to the segment’s previously announced closure of Canadian branches which took place in the first quarter of 2014. Adjusted income before taxes in the Distribution segment was $3.1 million in the fourth quarter of 2014, compared to $4.2 million in the fourth quarter of 2013. Savings realized from operational excellence initiatives during the quarter were more than offset by the decline in profits that resulted from a change in product mix. That concludes the financial review. I'll now turn the call back over to John for some summary and outlook remarks. Thank you. John?

Thanks Gregg. Please to turn to slide eight of the presentation. Early indicators during the first quarter of 2015 has shown a continuation of some of the same challenges in the Material Handling segment that occurred during the fourth quarter of 2014. However, we expect that the remainder of 2015 will benefit from the strategic actions we took last year and continue to take this year to streamline the business and solidify our structure. This should result in improved sales and earnings performance versus 2014. For example, we are in the process of reintroducing some legacy high volume Material Handling products and refocusing and enhancing our efforts around the commercialization of new products, both of which will help offset declines in other product categories and support future sales growth. We also remain committed to a balanced approach to capital allocation, which may continue to include a mix of capital investment, debt reduction, dividends and share repurchases. That concludes management's presentation. I'd like to 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, in addition to John and Gregg, the following segment Vice Presidents are also available to answer questions. Joel Grant, Senior Vice President and General Manager of the Material Handling Segment; Mike Valentino, Vice President and General Manager of Myers do Brasil, Novel, Scepter and Ameri-Kart; and Alex Williamson, Vice President and General Manager of the Distribution Segment. Go ahead please.

[Operator Instructions]. Our first question comes from the line of Mario Gabelli with Gabelli & Company. Please proceed with your question.

John, I was hoping I would not be first because I’ve been grazing between three or four other conference calls. Did you -- and I apologize for this, did you review the pro forma balance sheet for the closing of your Lawn and Garden?

We did not, Mario. It’s Gregg.

Are you filing a form to do that or can you just share with us some of the details of -- you haven’t -- you had something on the balance sheet called assets and how much of that is going to be -- how does that translate into -- how do we do it? You’ve got cash backs and paper white?

Mario, this is Gregg again. We sold the business for $110 million, of which $90 million was cash. $40 million was a note.

So if I take page -- what else -- sorry.

That’s all right. We also had escrow of roughly $8 million that was held for 18 months and then we had working capital adjustment in deal fees. The net proceeds at the end of the day is roughly $70 million.

So you’re saying the $90 million cash is $20 million of $8 million held back for escrow and $12 million of expenses?

Expenses and working capital adjustments, both.

Right. How much was paid to William Blair?

That we don’t disclose.

Well, why is that? Because they did a very bad job. I don’t want to blame them, but I have to blame them because my recollection is you guys were looking at $27 million of pro forma adjusted with add backs of EBITDA in the Lawn and Garden. And did they give you advice as to whether to ask for warrants or keep sending warrants on this deal on the backend?

No.

All right. I’ll just take it up with William Blair in public. Thank you. That was very helpful. The old story, move on.

All right, thanks Mario.

Sorry. I didn’t want to be first John.

Okay. It’s whoever got in first.

Our next question comes from Adam Josephson with Keybanc. Please proceed with your question.

Thanks, good morning John and Gregg? I hope you’re doing well.

We’re good. How are you?

I'm fine, thanks John. John, in terms of the outlook that you provided, can you discuss specifically what you are expecting to improve after the first quarter in terms of your end markets? Brazil I know it remains weak. The Ag market I don’t know what it’s going to look like a couple of quarters from now, but can you just talk about, in terms of end markets what you expect to look through, subsequent to this quarter?

Yeah, sure. This is John. I think, actually what I'm going to do is I'm going to ask Joel Grant to talk a little about expectations for end markets in Material Handling and I’ll ask Alex Williamson to talk a little bit about end markets in Distributions. So Joel?

Well, I would say that first of all we continue to introduce new products. As we get through the year generally they start to take hold in the second part of the year. We will have some activity around that. We do have some activity in the automotive industry. Many of the launches that happened this year and this year was a down year for launches. General Motors will happen after the July shutdown and re-tooling. We’ll see some of that activity. We’ll continue to work on productivity savings and the plans around use of alternative materials and automation. We’ve re-tooled a few of our legacy products to make them more efficient, more cost effective and allow us to compete more aggressively in some of these other markets. Those are a number of the things in Material Handling.

Alex?

On the Distribution side, we would expect our markets to be in line with miles driven and replacement tire shipments and we expect that to continue to be in the low single digits. So we expect to perform at those levels or better and in particular focus on enriching our product mix opportunities.

Thanks. So John, it sounds like you’re expecting the improvement to come more from internal initiatives and anything in terms of your end markets.

That’s correct. I think our focus is as the guy said on product introductions, Material Handling it’s a legacy product. Some of the legacy products that we are bringing back, certainly cost activities, headcount reductions. For instance in the case of Scepter, we are seeing a really nice increase there in sales and that’s probably due to the adverse weather conditions in the east and the south. All of those are opportunities that we see to make us believe that 2015 is going to be better than 2014 overall.

Got it. And just a couple more, John. You have a pretty good barometer for economic activity in general in the US. Have you seen any meaningful kinds of improvement here just on account of the falling gas prices, improving jobs etc.?

I think so. I know in this area, in the Akron area there is -- some of the other CEOs and I have had some discussions around, we see some improvement. I think it’s dependent upon the particular industry that we are talking about. One of the good barometers for us is we kind of follow especially on the Material Handling Ag side, we follow John Deere and if you saw their recent release, their expectations are as first quarter, second quarter, pretty slow and then a pick up towards the end of the year and it’s all around the crop futures and what’s going to happen there. But I guess I would say we are still fairly bullish on the economy and what should happen. I do find it interesting that a lot of people say that, but yet earnings aren’t necessarily following it. Maybe it’s because like us, we have a specific here to market that’s under some pressure. But again overall, I think we are looking forward to a better 2015.

Right, okay, thanks John. Just one in terms of capital allocations. Pro forma for the $90 million of cash, I have you at about 2.2 times EBITDA on a full that basis at year end, right? If I'm not mistaken you can go up to three in a quarter on that basis. So if those numbers are right, what do you expect to do in terms of buybacks et cetera this year and what’s the highest you want to lever up to for buyback and acquisition etc.? I know you can’t go above three in a quarter, but any thoughts along capital allocation this year and beyond would be appreciated.

Again our kind of unique balanced approach to capital allocation, if you look at what we returned last year to shareholders, over $70 million, which more than double exceeded our free cash flow. It’s really the same plan for this year. Our balanced approach is looking at paying down debt, returning cash to shareholders. Certainly we’ll spend CapEx for our new products and to keep our operations going. With respect to acquisitions, acquisitions if they would meet a financial screen and an operational screen, then we would take a look at them. But it’s not necessarily the priority in 2015. The priority in 2015 is all around performance. 2014 was really, as I said the script, the board approved strategy of taking Myers from four segments to two. We accomplished that even though it wasn’t a stellar year. And that’s one of the reasons why the board approved returning so much cash to shareholders for their interest in Myers. 2015 is an operational improvement year and we are going to work on lowering our costs, operating improvements, focus on marketing of our products and the balanced approach to capital allocation. So it’s really kind of what we’ve been doing

Yeah, I'm sorry. Go ahead, Gregg.

Adam, this is Gregg. I would also add that you’re right. The leverage ratio could go up to a maximum of three in a quarter. To your question about what we’d be comfortable with, we are comfortable getting up around 2.5 for the right circumstances as we look at overall capital allocation. That being said, our preference is to keep our debt ratio down below two, but for the right deals just as we did in 2014, we are willing to take it up and be there for a short period of time and then work to bring it back down pretty quickly.

Thanks and on that basis, you’re at pro forma 2 2 right now roughly, right?

That would be correct. Somewhere near there.

And John, just one last one. The stock is up nicely today. It’s about $19. It’s trading a pretty healthy multiple of projected earnings. Do you view the stock -- do you consider it attractive here? Would you be buying more here? Anything you can share along those lines would be appreciated.

Go ahead, Gregg.

Yeah, I’ll cover this one. Our position is our stock is always undervalued. As to buying and going forward, we don’t comment on what we are doing once we are inside of a quarter. What I will say is that we did buy in the fourth quarter and we still have 4.4 million shares under our authorized buyback and we look at that as part of our balanced approach looking at all of our options as to what the right answer is.

Thanks a lot Gregg. Thanks, John.

Our next question comes from Brian Sponheimer with Gabelli & Company. Please proceed with your question.

Good morning guys. Just a couple from me here. You talked about the Scepter performance in the quarter. Was that all-weather related? You had a difficult first quarter with the company in the third quarter. What was it that changed for Scepter and what were Scepter’s total sales just so I can back into the legacy business?

I'm going to ask Mike Valentino who’s just taken over and bear in mind that Mike has been with us a very short period of time, but has certainly jumped into his new role of overseeing Scepter as well as Brazil and Ameri-Kart. But we don’t split out individual company’s sales, but I’ll let Mike talk a little bit about what we are seeing in the first quarter and down the road.

Good morning Brian. So I would say Scepter’s fourth quarter results really didn’t have much to do with weather related circumstances. So I would say it was just a solid performance by them in the fourth quarter. And the first quarter here, we are certainly seeing the impact of some of the adverse weather in the northeast and the southern parts of the country. I think what we saw in the middle of last year shortly after we acquired them was a little bit of an anomaly and they’re back on track.

Brian, this is Gregg. I will also add that the key is, for Scepter, their fourth quarter or our fourth --- in the fourth quarter, which was their second quarter of our ownership of them, their performance was in line with our acquisition expectations. So our third quarter truly appears to be an anomaly. As Mike said, first quarter we’ve seen some nice pickups due to the weather for Scepter for the quarter. As we move forward, we expect 2015 to be a strong year for Scepter and to be nicely accretive to our overall earnings. With respect to the individual sales as John touched on, while we are not going to disclose that amount, Material Handling in the fourth quarter was up solely due to Scepter. If you take Scepter away it would have been down just slightly. So that at least can give you an idea of about the amount that it was up.

Okay. And just remind me the seasonality for this business, is the best quarter for this business the second quarter as you head into the summer season?

Yes. And one thing that you have to keep in mind there is that weather helps you on the one side, but it’s a two edged sword because right now the big boxers are starting to think about bringing in power equipment and so on and loading up their facilities, especially in the south. So if the weather doesn’t break, that delays that. So you can see somewhat of a delayed season or even a shortened season. So we are all doing a rain dance here, a snow dance here hoping that it stops.

Right, understood. And just a separate topic, you had agreed to sell Lawn and Garden for $115 million. It came in at $100 million. Was there ever any thoughts to pull the deal and was there [indiscernible] price on your end that you thought that the deal wouldn’t have made sense to sell?

We think the deal made sense at $110 million. The business was under significant pressure from competition and from some other situations. We think that overall, the sale of Lawn and Garden which was absolutely strategic was something that we needed to move forward with. We pulled the board. It was a unanimous decision to sell and by all accounts, we feel that we did the right thing by letting that business move on to a better owner.

I’ll add Brian. I think you said we sold it for $100 million. It was $110 million. Just want to correct that.

Did I say $100 million? I meant $110 million if I did.

No, I appreciate that.

All right, thank you very much.

[Operator instructions] Our next question comes from Christopher Butler with Sidoti and Company. Please proceed with your question.

Good morning everyone. I was hoping you might be able to give us a little bit more color on the customer in the food storage business that with the acquisition. Is this just a temporary inventory type of issue that you face or is this potentially new customer you have, potential customer that you’ve lost? Could you walk us through that?

Hi Chris, this is Joel Grant. We won’t get into customer names. We would never do that, but it was a particular customer that has bought over a number of years. It’s a conversion that’s an ongoing process as they convert to another form of packaging into plastic containers. They are under new ownership that’s kind of put a halt on capital spending and they are getting their hands around the business. So it just slow things down. I wouldn’t say it's an elimination, but certainly it's somebody how we had learned to depend on in the first half of the year and this year that’s not going to happen in Q1.

Chris is Gregg, I'd also say, I know Joel didn’t necessarily mention it, but it’s not a case where we believe we’ve lost share at all. It’s simply a case where they have suspended capital spending. And as Joel said, the conversion of the products right now as they go through their normal integration of an acquisition.

This is John. I think it's typical of any major acquisition where there is a period of time where there is an evaluation as to what they can do, especially from a synergy standpoint. The product we sell is pretty critical in their process. So again we think it's more of a speed bump here rather than a detour.

As we look at raw materials, it sounded as if from your comments that at least in the near term falling materials is creating some deflationary spending delays by customers. As we look out, I assume that you expect that to end soon, but do we see a benefit on the raw material side or do your new contracts kind of offset any benefit you’re going to see over time?

Chris, this is Gregg again. What we have as I think you’ll remember, we have some contracts that are indexed. That index can be anywhere from a month to a quarter. So you can see the impact of price, particularly with respect to lower resin where the price we can continue to hold it for a period of time on those indexes, until roughly anywhere from 30 to 90 days out. With respect to those that are not indexed, we are definitely seeing some price pressure as resin has come down significantly here since December. And we’ve been prudent in trying to delay any price decreases wherever possible so that we can expand margin, but ultimately in a competitive market as resin moves up and down, you’d have to price it. But we are trying to protect margin wherever we can and actually increase it.

Chris, this is John. I also think that -- I'm not sure I'm calling the bottom on decrease for resin prices, but it's certainly getting close to it. Our suppliers are very experienced at this. When they do have a problem where that work is in a freefall, generally things start to happen like force majeure. Some of the smaller operations as well as maintains turns increase dramatically. So it certainly starts to restrict supply of product. They start to export more if they can. And so that really starts to call a whole draw to the slide in resin prices and the beginning of a typical up turn.

I apologize, I missed it earlier but you said the tax rate for 2015 is expected to be what?

Roughly 32.5% and that’s due to as we shift into more international business with this after acquisition for a full year

Thank you for your time.

Our next questions come from Chris Manuel with Wells Fargo. Please proceed with your question.

Good morning gentlemen. I guess I’m going to have to borrow Mario’s fast fingers with the dialing going forward. A couple of questions for each one of you. First let me start with just a pretty simple one. Can you refresh us now on what your resin buy is? You had a bunch of portfolio moves last year, stuff coming, stuff going, but roughly how many tons do you buy, what are their primary grades, etc.?

I think we are probably on virgin material -- since we don’t have Lawn and Garden any more, it's certainly down probably about 40%. I would say we are probably in the range of about $100 million of virgin material. Primarily split I think right now, probably PE is 65%, propylene is 35%, somewhere in that range. The good news is that PE they are still cracking it off of heavy feeds which means oil. As oil continues to freefall that has certainly put pressure on them to keep them from raising prices on us.

Okay, that’s helpful. So the next question is, help us maybe, Gregg if you have it there, the rough seasonality of the -- if memory serves, the Scepter business was about $100 million of revenue. So if I straight lined it, it would be 25 or so a quarter. But what is the seasonality of that? Can we a have a sense as to -- you mentioned earlier 2Q is a little bigger, but how much? How would I think about if I was going to break out a hundred, a rough mix of how that would flow quarter to quarter to quarter?

Q2 would be somewhere in the 30% to 32% range. Q3 is and I'm doing this off top of my head, is going to be slightly lower than 25. Q4 is our weakest quarter and then Q1 one starts to ramp up a little bit. It's the second largest quarter, but Q2 is clearly the strongest quarter.

Q2 is the strongest. Q1, the second, and then three and then four?

Yes and three -- the one thing I’ll say about three is that while clearly we had a weak Q3 last year under our first quarter of ownership, Q3 can always be a wild card and that’s due to hurricanes. If the hurricane season coming through strong, and you have a couple of large -- one large one that hits land fall, Q3 can be significantly stronger to where it's not that much below Q2. A – John Orr: It might be the biggest quarter depending upon some weather type situations.

Correct.

But the issue in Scepter in July or August when that took place, I think you guys indicated to us it was a onetime event that hadn’t happened in I don’t know,10 years or as long as you look back at numbers. So I guess I’m not assuming that recurs. But I guess where I'm going is if I kind of work through this then I'm making assumption that Scepter added in the neighborhood of $20 million of revenue for the fourth quarter, maybe a touch more than that. And I look at what the whole business did and then the whole Material Handling component did and I'm trying to help understand or flip back to in your slide, on slide 11 where you’ve got Material Handling index rate that should have been up mid to upper single digits. If I can get a sense, it would sound like the business had to have been actually off something mid to double digits down. So can you help us maybe, within the component to the extent you can, was it all related to Ag in a certain region? Was there, etc.? Was it through the catalogue business or what have you? Where did we see the weakness? And as yon look more importantly into 2015, why you wouldn’t be up mid-single digits there in line with the index?

Chris, this is Joel Grant. Let me talk about the Q4 and we don’t get into molding things out too definitively, but what I can tell you is that the combination of the sales volume and the mix has impacted operating income negatively by about $3 million. As John’s remarks and others, we expect Q1 will also be impacted similarly by what’s going on in the agricultural market primarily, but also in the food processing market. Those are the kind of impacts that we are looking at, Q4, Q1. A lot of the agricultural activities either during the first part of the year or the last part of the year, we think things will begin to rebound as we go through the year. If you look at other folks that are doing their same earnings reports, they are talking about the most pain being in Q4 and Q1 and then things returning to more normalize in the outer quarters. We are looking at that as well and then when you add to that some of the new product introductions, the productivity projects that we are working on and the gains that those will throw off in the second half, we think that will bring us back to those normalized levels above 2014.

Chris, this is Gregg. I’ll also add that clearly in the Ag, corn and soybean continues to be depressed, the prices of those to where we are not seeing the planting that you’ve seen in the past. As John alluded to earlier, if you look at the companies that are good bell weathers for us, the Deeres, the ConAgras etc., AGCOs, those are all not having – most of them had a tough fourth quarter. Most of them have said they’re going to have a tough first quarter and so that is impacting us at the end of the day.

Okay. So this sounds like stuff that’s mainly outside of the index or you’re disproportionate to this component.

Yes. Definitely.

Okay. Maybe along on the -- I’m sorry, on the same material handling piece, Mike, could you address maybe how things are going? It sounds like you it’s so soft as an Ag in Brazil, but you also have a pretty good sized bottle crate business that you’ve acquired, how that business is doing as well.

So Brazil, I would say overall, I just came back from a trip there and there is concern in Brazil overall with the economy. There’s some drought situations going on in Sao Paulo State. If you look at the reports out of the Brazilian automotive market, they were extremely poor in the December timeframe and they’re starting off poor in January here and we are somewhat dependent on the automotive market for some of our containers in Brazil. The bottle crate business for us in Brazil remain healthy and we anticipate with some new product introductions that we’re looking at here in the first half of the year for it to help our business overall down there.

Okay. Could we switch gears for a second and maybe talk about the distribution business. The question is somewhat similar. When I look at your indices back here for miles driven or different ones that you look at, they seem to have been still pretty good. And when we look at, I guess the other pieces you have back here, replacement tire and gas sales, I think they’ve still been doing okay. I guess the business there has been shrinking a bit too. I appreciate there are some weakness or you sliced off the Canadian piece. But I think a few calls ago you disclosed that you weren’t making money up there. It should haven’t had an issue on the EBIT. Could you maybe help us with what you’re seeing there and is there a path in that business or what do you think that business is capable of on an EBIT basis the next couple of years? Can it get back to something in the $28 million-ish range?

Chris, this is Alex Williamson. In terms of the underlying domestic business, we could see that it did track the key indicators in terms of the overall topline growth. And as we pointed out, the decline was due to the closure of the Canadian operations as well as a decrease in some custom business on one side of the business. As Gregg mentioned, we did struggle with some product mix issues that we plan on reconciling here in 2015 and are very optimistic about doing so. In terms of the business gaining fraction when it comes to improvement and overall operating income, what I can say is that we have plans to drive continuous improvements. We have good, solid strategies in place to drive improving performance in the segment and we are very confident that we’ll be able to see that both in 2015 and the years to come.

Okay. And then one more question for John, or actually two. First John, new product development. I know that’s something you’ve been working quite a bit on and I think your had a target to work towards 10% of sales of new products. Where are you or where did you wind up 2014? I know that it will probably show up in an annual report somewhere, but where are you as you sit today in that process?

We introduced about 50 new products, Chris in 2014, products like the Intrepid which are a sugar box and also used for to leach herbs. We need to introduce a new 32 30 box, new beverage crates, etc. We plan to introduce about 35 new products in 2015. Obviously for competitive reasons we’re not going to disclose what they are, but we’re on target to meet our goal. It fluctuates a little bit. I'd say we were probably in at about 8% last year I guess, between 7% and 8%. So we are getting there. We are obviously making sure that we’re not just introducing products that we think are good products. We’ve got to understand what the customer wants and that’s a whole process. And both in Material Handling and in Alex’s business in distribution, in Alex case, we’ve added some new very talented marketing help. We need to understand through voice of the customer what the customer is looking for so that we can design products then for them rather than us come up with the idea, but we are on track. I'm going to keep driving this organization until we hit that 10% mark and when we do we are going to try for 15%.

Chris, this is Gregg. I would also add that roughly just under 8% for 2014. That obviously didn’t include anything from Scepter. We expect Scepter to launch some good new products in 2015 that will help that number as well.

That’s correct. It does not include those.

Okay, that’s helpful. And then the last question, John, just trying to think where you are to the process. Here on the front page of the press release, Company completes strategic initiatives to focus. So should I interpret that as you look at the portfolio today, you’re satisfied with where things stay? You’re done with the adds and deletes for wholesale items as you sit today. Is that a fair assessment?

I think that’s a fair assessment, Chris. We have seven companies in Material Handling and three companies in the Distribution business. I think we are very pleased with all of those companies. They all certainly have challenges but we’ve got a great team here working on those challenges. I guess you could say that -- as I said earlier, from an acquisition standpoint, if something would happen to be presented to us that meets our financial screen and our operational screen, then we would certainly review that with the board of directors. But at this point we don’t have anything like that. So our balanced approach is going to be is to utilize our CapEx for new products and to grow the business. We’ll continue to return cash to our shareholders and that’s been our approach. What we said in the press release really is that we’ve completed the strategic plan that we started around trying to focus this business into two operating segments. I think we can say now with the sale of Lawn and Garden obviously to a better owner that we have accomplished that and now this 2015 is the year of performance. I challenge the entire team around performance. Compensation is based around performance and our plan is to certainly exceed 2014 in our 2015 performance.

Thank you. You just brought up one topic -- I know I said it was my last question, but I wanted to broach in your answer there. You said your incentives for 2015 are aligned on performance or around hitting certain milestones. I appreciate maybe you don’t want to share with us what the exact target percentages are or how the payouts work for competitive reasons, but what are the key areas you’re focusing on? Is it a portion of new product development? Is it reducing working capital? Is it a new merger?

Chris, you know I'm not going to get into all that detail for competitive reasons. But obviously each of our businesses are driven off of cash flow and bottom-line performance as well as activities around creating new products and so on.

And there’s also a strong piece of our total compensation and ROIC over a three year period. So making sure that we don’t do something shortsighted, that we balance short-term with long-term.

Okay, that’s helpful. Thank you guys.

Our next question is from Adam Josephson with Keybanc. Please proceed with your question.

Thanks for taking my follow up, John and Gregg. Just on free cash flow, so you did $28 million this past year. Obviously you’re expecting net income to be up on account of better operational performance and presumably the Scepter contribution. You also have CapEx up by call it a few million. Working cap was about $10 million source of cash this past year. I don’t know where you’re expecting it to be in 2015. But do you expect free cash to be up or down meaningfully in 2015 versus 2015? Or is this $28 million-ish a reasonable sustainable number from your perspective?

Adam, this is Gregg. We don’t expect to see any significant improvement in working capital this year. We got the biggest bump as you know last year, or I mean in 2013 with the change in accounts payable term. We did see some benefit this year as you alluded to in total working capital as we continue to work hard on working capital. But I wouldn’t necessarily model anything in for any significant improvement there. What we would expect is that our earnings will be stronger and so that will help us. Overall I would say that our free cash flow, you can probably target between $30 million and $35 million for next year.

Got it. Thanks a lot, Gregg.

There are no further questions at this time. At this point I’d like to turn the call over to your host, Monica Vinay for closing remarks.

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 also immediately be available via 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. This will conclude today’s teleconference. You may disconnect your lines at this time. Have a wonderful day.