Transcript of
Myers Industries, Inc. (MYE)
2010 Q2 & Six Months Earnings
Call
July 22, 2010
John C. Orr,
President and Chief Executive Officer
David B. Knowles,
Executive Vice President and Chief Operating Officer
Donald A.
Merril, Vice President and Chief Financial Officer
Max
Barton, Director of Investor Relations
Operator
Greetings and welcome
to the Myers Industries 2010 Q2 and Six Months Earnings Call. At this time,
all participants are on a listen-only mode. A brief question and answer
session will follow the formal presentation. If anyone should require operator
assistance during the conference, please press *0 on your telephone keypad. As
a reminder, this conference is being recorded.
It is now my pleasure
to introduce you host, Mr. Max Barton. Thank you, you may begin.
Max Barton – Myers
Industries, Inc. – Director of Investor Relations
Thank you, June. Good
afternoon and welcome to the Myers Industries’ call to review our 2010 second
quarter and six months financial results. I’m Max Barton, Director of Investor
Relations for Myers.
With me today are
John Orr, President and Chief Executive Officer; David Knowles, Executive Vice
President and Chief Operating Officer; and Don Merril, Vice President and Chief
Financial Officer.
This morning we issued
the news release detailing the financial results for the second quarter. If
you have not yet received a copy, you may access it from our website at
myersind.com under the Investor Relations tab. The call is also being audio
webcast from our site and will be archived there along with the transcript.
Before I turn the
call over to management for remarks, I’d like to remind you that we might make
some forward-looking statements during the course of this call. These comments
are made pursuant to the Safe Harbor Provisions of the Securities Reform Act of
1995. Such statements involve risks and uncertainties which may cause results
to differ materially from those set forth in these statements. These risks and
uncertainties are detailed in company’s SEC filings and may be found in the company’s
10-K filing.
Following management’s
remarks there will be a brief question and answer session with the investment
community.
I’m now pleased to
turn the call over to John Orr, President and Chief Executive Officer. John?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Thanks, Max, and good
afternoon everyone. It’s a pleasure to have you with us.
As you’ve no doubt
read, raw material cost pressures during the second quarter adversely affected
our performance primarily reflected in the Lawn and Garden segment. I will ask
David Knowles to address this issue in a few moments.
Our other three
businesses continue to show positive signs of recovery in their end markets with
favorable impact of volume, pricing, cost controls, and restructuring benefits.
Just to hit the key
highlights in the overall second quarter results from continuing operations
compared to last year were: Net sales for the quarter for $175.9 million, an
increase of 6% primarily from higher unit volumes. We reported a loss net of
taxes of $1.1 million or $0.03 per share compared to a loss of $700,000 or
$0.02 per share in the second quarter of 2009. Also of note, the loss from
continuing operations includes special pre-tax expense of approximately $1.6
million in 2010 and $7.4 million in 2009, both primarily related to
restructuring activities as detailed in the news release.
Our six months
results from continuing operations compared to last year were: Net sales for
the first half were $362.3 million, an increase of 4%; again, from overall
higher unit volumes in our markets. Income net of taxes was $4.4 million or
$0.13 per share compared to $5.5 million or $0.16 per share in the first half
of 2009 as discussed in the release. Income from continuing operations for the
first half of 2010 includes special pre-tax expenses of approximately $2.5
million partially offset by a gain of $700,000 from the sale of a manufacturing
facility as part of our material handling restructuring program. The same
period in 2009, income from continuing operations includes special pre-tax
expenses of approximately $13.6 million primarily from our restructuring
programs.
Now, I’d like to turn
the call over to David… excuse me, to David Knowles to review some of the key
performance factors in our business segments during the quarter. David?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Thank you, John. And
as John said, I will focus on the frustrating challenge that we had in Lawn and
Garden. However, first, let me highlight the three other business segments
which delivered improvements in many operational areas. In all, we’re seeing
improvement in their end markets.
Let me start with the
Material Handling segment. Sales were reinforced by a favorable product mix
for reusable bulk containers in several critical markets. We think customers
begin to release capital spending in small measures. In addition, we have
stronger sales of small parts storage products to catalogers and see favorable
response to many of our new product offerings there. In fact, we’ve made solid
progress developing a pipeline of new product innovations in the Material
Handling segment and expect to bring to the market a steady stream of new
innovations in the future.
In the Distribution
segment, sales of supplies benefited from stronger replacement tire sales as
consumers began to pick up on some of the much needed vehicle maintenance ahead
of summer months. Business here also benefited from increased sales of steel
wheel weights as tire dealers and other customers make the transition from lead
weights to environmentally friendly steel weights. For example, Goodyear has
selected head of the industries beta brand to supply its retail and just tires
network with steel wheel weights and beta has partnered with Myers Tire Supply to
distribute its steel wheel weights to Goodyear retail stores. In addition, we’ve
picked up new business with fleet catalogers and also through our international
operations.
Sales in the
Engineered Product segment continue to benefit from increased business from
recreational vehicles, marine, and transplant automotive markets. Wholesale
shipments of our RV products, mainly towable platforms, remain strong compared
to last year and our business benefited from several key new business wins in
the second quarter. Our transplant automotive business here continued to
strengthen in new orders in the industry’s development of new vehicle platforms
for coming seasons. The combination of our solid sales growth and
restructuring activities has generated substantial profit improvement in the
Engineered Products segment this year.
As John mentioned
earlier, our loss for the quarter was driven by a sharp increase in raw
material cost that severely impacted the Lawn and Garden segment. The purchase
cost of polypropylene, our primary raw material on that business, increased
approximately 80% over its purchase cost in the same quarter of 2009 and that
impacted the business by over $9 million. At the same time, Lawn and Garden
suffered reduced availability of its lowest cost recycled material and added to
these pressures was increased cost of freight. While the group increased
prices on new orders in the second quarter, the majority of orders shipped were
booked with set prices and terms well in advanced of the announced price
increase. Given the dramatic resin cost volatility seen this year and its
unusual timing in the season, it is clear that the traditional pricing
mechanisms used in the Lawn and Garden industry aren’t sufficient. We’re
engaged right now reexamining traditional industry practices in developing our
approach to reduce these broad exposure to resin volatility.
Now, somewhat hidden
underneath the poor profitability performance in Lawn and Garden are some clear
signs of progress from our restructuring benefits and our new management team,
key initiatives in the business. We saw evidence of these in the second
quarter. Our restructuring continues to provide improvement in lowering
nonmaterial related plant cost and we have more runway to go here. Our order
fulfillment initiative in our plants has increased durability to perform to
schedule and our delivery metrics continue to substantially improve over the
last few months. And in fact, we’re up substantially in performing for our
customers year over year.
The new product
development process will introduce products into the grower direct and
distribution channels during the third quarter that will further demonstrate
our commitments being the growth and innovation leader in the marketplace.
As a result of these
and other actions, we’re demonstrating an improved position with our customers
and we delivered sales growth in the second quarter over the prior year
developing what we believe will be a sustainable trend.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Okay. Thanks,
David. Now to quickly review the second quarter and first half financial
results from the business segments as well as some of the other key financial metrics,
I’ll turn the call over to Don Merril, our Chief Financial Officer. Don?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Thanks, John.
Turning to some of
the other financial measures we reported in our press release this morning,
gross profit was 19.3% in the second quarter of 2010 compared to 25% in the
second quarter of 2009. As we’ve said, the decrease primarily reflects the
impact of higher raw material cost and pricing pressures in our Lawn and Garden
segment.
For the year-to-date,
gross profit was 21.8% versus 27.8 % in 2009. As discussed earlier, benefits
from our restructuring programs and volume gains were offset by the rapid and
steady increase in raw material cost throughout the first half of the year.
SG&A declined
$6.6 million in the second quarter of 2010 and $13.7 million for the first half
of the year compared to those same periods of 2009. This was primarily due to
cost control in operating expenses and benefits from our restructuring
programs. Total debt was reduced from $120 million at the end of the first
quarter this year to $116.8 million at June 30, 2010.
Now turning our
attention to continuing operations in our business segments and their
performance. This is detailed in the news release and given here again for
color and the benefit of those who may not have read through the release yet. Results
for the second quarter and first half are all compared to the same period of
2009.
In our Lawn and
Garden segment, sales in the second quarter increased 6% primarily due to the
seasonal increase in demand from our grower markets. The sales decline of 4%
for the first half primarily reflects the weak economic conditions earlier in
the year as well as cautious inventory management by our customers. The
segment’s loss for both the 2010 second quarter and first half reflects the
impact of higher raw material cost which were mostly unrecoverable due to the
timing and magnitude of the increases in the quarter. Pre-tax loss was $5.5
million in the quarter and $700,000 for the first half as compared to pre-tax
profit of $1.2 million and $12.8 million in the same periods of 2009.
In our Material
Handling segment, the sales were down slightly at 4% in the quarter and 1% for
the first half. As noted earlier, the segment continues to experience gradual
demand recovery across its wide range markets for reusable containers and
storage systems. Pre-tax income in the quarter was $3.5 million and $8.9
million for the first half, down 3% and 13%, respectively. These shortfalls
are primarily due to higher raw material cost which could not be fully offset
by favorable mix and restructuring program savings.
In our Engineered
Product segments, sales were up 39% and 32%, respectively, for the second
quarter and first half reflecting the higher demand for our custom products in
the RV and automotive markets. Profitability strengthened significantly for the
quarter and first half. Pre-tax income was $3.1 million for the quarter
compared to $700,000 in the second quarter of 2009. For the first half, income
was $5.6 million compared to a loss of $300,000 for the same period in 2009.
In our Distribution segment,
sales increased 9% in the second quarter and 8% for the first half. This
performance tracked closely with stronger replacement tire sales as well as
benefits from our increased focus on sales management activities throughout the
distribution network. Pre-tax income increased 44% for the second quarter and
38% for the first half primarily due to higher unit volumes and a favorable
product mix of supplies.
Now, I’ll turn it
back over to John for a wrap up. Thank you. John?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Thanks, Don.
Entering the second
half of the year, we see the raw material cost have moderated and the company
expects benefits from that coupled with its margin improvement initiatives and
cost controls but we are cautious in our outlook. We are optimistic that end
markets will continue to recover across our businesses. Our financial position
remains strong with our cash management and available credit lines providing
opportunities to grow the business. This could be through potential
acquisitions or purchase of new technology applications. For example,
yesterday we announced that our Ameri-Kart business, part of our Engineered Products
segment, acquired a new patent pending grain fuel tank filling technology from
Enviro-Fill Incorporated. This unique overfill prevention system or OPS
technology will help boat manufacturer’s meet mandatory 2011 refueling and
emission requirements from the Environmental Protection Agency. The Enviro-Fill
OPS is the industry’s only system that uses technology that is compatible with
any boat’s design to automatically shut off the refueling nozzle when the fuel
in the tank reaches 95% full without spillage. This OPS tank vent and sensor
system provides venting and monitoring of the fuel level in the tank during
filling and transfers a pressure signal to the deck fitting when fuel reaches a
predetermined level. This is a major technology leap for Ameri-Kart as a
provider of component solutions to the marine market and will enhance the
company’s growth as a key supplier to this market.
In addition, the
company has continued to invest in new low cost manufacturing technology for
the Lawn and Garden segment. We are adding more co-extrusion thermal forming
manufacturing capability to our business to meet the increasing demand from the
grower markets for co-ex containers versus injection molded containers. Such
investment will continue to position our place in the market as the single
source supplier of choice with the best resources to meet customer needs.
Finally, we’re also
reviewing several options for realigning our industry leading Distribution segment
operations to decrease costs and enhance customer service. This involves
potential changes to our model with consolidated inventory locations through
distribution centers while maintaining our critical strategic sales presence
and representation throughout our markets. This would position us to capture a
greater market share. As we noted in the news release, updates on any such
program will be provided in future earnings releases as potential actions are
implemented.
With that, I thank
our investors for being here today and I also thank our customers for their
support and our employees for the commitment they have for the success of Myers
Industries.
That concludes
management’s presentation. So I’ll turn it back over the Max so we can take
your questions.
Max Barton – Myers
Industries, Inc. – Director of Investor Relations
Thanks, John. I’ll ask
the operator now to go ahead and direct the Q&A phase of the presentation.
Go ahead, June.
Operator
Thank you. Ladies
and gentlemen, if you’d like to ask a questions, please press *1 on your
telephone keypad. A confirmation tone will indicate your line is in the question
queue. You may press *2 if you would like to remove your question from the
queue. For participants using speaker equipment, it may be necessary to pick
up your handset before pressing the * keys. One moment please while we pool
for questions.
Our first question comes
from the line of Chris Manuel with KeyBanc Capital Markets. Please proceed
with your questions.
Chris Manuel – KeyBanc
Capital Markets
Good afternoon,
gentlemen.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Hi, Chris.
Chris Manuel –
KeyBanc Capital Markets
Couple of questions
for you, let me start with volumes. So, Don, you did a good job walking
through kind of the revenue changes but with all the moving parts with material
cost and other things of that nature in there, do you have a sense of maybe
what base organic volumes were like across each one of your four segments and
how that might compare to what you would think the industry did?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Well, I can tell you kind
of what the base growth is. I’m not really sure that I can comment on the
industry growth. But I could tell you in Material Handling core growth there,
we were down a little bit quarter over quarter. However, in that business our
legacy business, our Buckhorn business, was actually up 3%. Our Akro-Mills
business was way up, pushing 30% growth, and the reason why it was down is that
we had softer pallet sales in the quarter versus last year. Lawn and Garden
core growth was about 3% after we adjust for FX. Distribution was up by 9%
quarter over quarter and Engineered Products was up about 30%, most driven… all
three of our businesses within our Engineered Products division or segment had
a great quarter but our Ameri-Kart business would have led the way there.
Chris Manuel –
KeyBanc Capital Markets
Okay. And then,
either David or John, can you comment on what you anticipate over the next…
through the balance of 2010, the debt volume trajectory could continue or maybe
get better, get worse, any softness, weakness that you’re seeing out there?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Yes, let me… this is David.
Let me take a shot at that Chris. If we go segment by segment, Material
Handling, we see continued growth in our traditional businesses, the legacy
Buckhorn and the Akro-Mills business. The pallet business there has been down.
It’s our expectation that that should begin to grow again but were remaining
sort of cautious in watching that one. In the Lawn and Garden business, we
expect to see continued year-over-year growth; we started to see that in the
second quarter now. Our performance to our customers I think is improving and
will yield growth in the second half. And then our Engineered Products
business, we’ve had a strong kind of recovery in those business. The RV
industry through the first half was up over 100% year over year. The
transplant automotive is up quite strong. We see some of that tapering off but
we still see good growth in the second half with the Engineered Products
business. Distribution, we see that is kind of on a steady trajectory of
growth and we expect that to continue.
Chris Manuel –
KeyBanc Capital Markets
Okay. And then a
question for you, too, as well, John. As we look at the Lawn and Garden
business, that’s a business that if memory serves you, you almost doubled the
size back ’06, ’07 with ITML. And you guys have had a pretty dominant market
leading position at least for four or so years now. The contracts and things
of that nature, has something changed in the competitive landscape that has
made contracts that you’re setting more challenging today. I guess what I’m
not understanding is there seems to be an issue with how you move material
costs through that kind of make it a hit or miss sort of thing and I know you
indicated that you’re going to start to address those but why now? Why not a
few years back and how can you fix those?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Well, both David and
I will answer that, Chris. From my perspective, I’m still very, very bullish
on this business. Unlike our Material Handling business where 50% of our
business does have contracts that allow us to recover or give back to the
customer on a regular basis when the price of plastic resin goes up or down.
We don’t really have that in the Lawn and Garden business. The industry has
never settled on that. Over the years, we know that we’ve written up and we’ve
written it down and we’ve always been able to be pretty quick on our feet, I
guess that’s the way to put it. This hit that we took was very unexpected and
such a quick hit up and down that the reaction time was just wasn’t there.
Now, I’m going to let
David go on to talk about what were going to actually try to do about it as
best we can in a public phone call. So, David?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Yes. Let me just sort
of add to what John said kind of about the mechanism. I think, Chris, the
issue that we’ve had is the mechanism hasn’t changed while what we’re seeing
here… I think you go back to the third quarter of ’08 and now the second
quarter of 2010, we’re seeing much greater volatility than we’ve seen
historically in the business. And that mechanism for how raw material costs
get passed through to the market really hasn’t changed and I think that’s, of
course, what we need to change. We have done a significant amount of
restructuring in the business and as we were putting business together for this
year, really you’re talking about business that is set largely in the third
quarter of any year and most of the demand in that business is taken in the busy
spring growing season. And that’s what caught us this year because as we saw
resin prices increase, they began to increase and then in spiked in that April
timeframe and then came right back down. We actually put price increases
through at the end of the first quarter but most of the orders were already
booked. They’re already booked considerably before that.
And I think the
answer to what we’re doing going forward, we’ve got a new team in at Lawn and
Garden, right now. We’ve got some fresh eyes and people who have experienced
dealing in this kind of environment and we’re working through a number of
different mechanisms. I don’t think there’s going to be one mechanism that
applies to the whole industry. I think we’re going to have to work at a number
of different mechanisms to make sure that increases like this can get passed
through into the market as they occur.
Chris Manuel –
KeyBanc Capital Markets
All right. And the year-over-year
delta, did I hear you say right? It was about $9 million for… yes, that was
the impact, the negative variance for resin in the quarter?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
That’s right in the
Lawn and Garden segment, that’ right.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
An easy way to look
at that is, we buy about 30 million pounds of propylene in that quarter and the
average price over that quarter was up $0.30 a pound, so it’s pretty easy to do
the math.
Chris Manuel – KeyBanc
Capital Markets
Well, if that was, are
there any… I know you had a charge this quarter. I think it was a $1.6 million,
if memory serves. Which segments where that had showed up then?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Don, will have to
answer that one.
Chris Manuel –
KeyBanc Capital Markets
Were there any of
that in the L&G segment? I guess this is where I’m really going.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Very little.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Very little.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
The back page of the
press release will work walk you through that, Chris.
Chris Manuel –
KeyBanc Capital Markets
Okay. I’ll check the
back page.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Right. Restructuring
expenses in Lawn and Garden in Q2 was $100,000.
Chris Manuel –
KeyBanc Capital Markets
Okay. So I guess where
I’m going with this question then is even if I take the $5.4 million loss this
quarter and if I make an adjustment back $9 million bucks to compare apples-to-apples
for resin, that would imply that you could have made $3.6 million. Last year,
you did $5.4 to the positive. So even with higher volumes, even adjusting for
material costs, there’s what would appeared to be a degradation in the
business. So is there… the material stuff aside, I appreciate that you’re
doing some work on contracts. Can you maybe address as well what’s changed
structurally to secure the profitability outlook?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Hold on just a second.
Don’s getting some numbers.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Well, I do think we
have to take into consideration the FX for that one. If I look at Lawn and
Garden, there’s also some mix involved in quarter over quarter that attributed
close to a million dollars and that mix would be where selling lower margin
products into the marketplace in the second quarter and you’ve got FX out there
of about $2 million.
Chris Manuel –
KeyBanc Capital Markets
Okay. All right. That’s
all I have. I’ll jump back into queue. Thank you.
Operator
Thank you. Our next
question comes from the line of Christopher Butler with Sidoti & Company.
Please proceed with your questions.
Christopher Butler – Sidoti
& Company
Hi. Good afternoon,
guys.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Hi, Chris.
Christopher Butler –
Sidoti & Company
Continuing with the
Lawn and Garden questions, you had mentioned that you had been putting in… working
to achieve better service for your customers. Could you touch on that a little
bit more and is this something that’s costing you more money, but at this point,
we’re not really seeing the benefit on the revenue side yet?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
This is David
Knowles. We’ve got a… we’ve been through a fairly substantial change in that
business through the restructuring that we did last year and part of that now
coming out of the restructuring that we did is a set of key initiatives. Key
initiatives around order of fulfillment, around plant schedule attainment,
ultimately culminate in our ability to deliver on time to our customers
competitively and that’s really been the focus as we’ve kind of gone through
the changes in the restructuring that we’ve gone through. We had to reestablish
an ability to really deliver on time competitively in the market and that’s
where we’re now starting to make some real progress.
Christopher Butler –
Sidoti & Company
It sounds as if these
were metrics that had slipped a little bit due to the restructuring?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I would say that yes,
they did. They did and we’ve had some challenging experiences with our
customers here recently. But I’ll tell you in the… as you look over the last
few months, that’s starting to really improve. And I think I’ve mentioned
earlier, we’re starting to see some… starting to see some year-over-year growth
and I think that’s a reflection of the confidence that we’re starting to
rebuild with our customers. And I think to follow up on your earlier question,
that’s not coming at a significant cost to the business. These are things
where we’re sorting through and developing and improving the internal processes
that we use to get our product to the customer on time.
Christopher Butler –
Sidoti & Company
And as we look to the
third quarter with raw material costs coming down, understanding that you
probably have higher costs in inventory, but could we see a profitable quarter
in the third quarter or are we going to look something more similar to what you
posted for the second quarter on Lawn and Garden?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I think you’re right.
I think as we move into the third and fourth quarter, you’re going to start to
see margins creep back up. We had gross margins of 7% in the second quarter in
Lawn and Garden. We don’t anticipate that in the third or fourth quarter. In
fact, we anticipate by the time we get to the fourth quarter those margins will
be equal to or exceed the first quarter which was around 22%.
Christopher Butler –
Sidoti & Company
And could you give me
an idea of pricing sequentially in the different segments? What kind of success
you have had with getting any pricing through in a difficult environment?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Why don’t I address
that at least at a top level? In our Material Handling segment, we have a
series of mechanisms that allow us to translate price through to the market as
resin cost increase. Now, that doesn’t cover the whole segment but it covers a
substantial amount of that segment and so we have seen some price impact in the
second quarter but we expect to kind of recapture a benefit to that more
quickly in the Material Handling business and we’re able to pass that through
more quickly. In our Engineered Products business, there are some different
businesses where the cost of resin is largely taken out of the equation because
of how we do business. In Ameri-Kart, it’s almost a business that’s done to
order. And in our WEK business, the material cost changes are translated
directly to our customers. So the business that is truly impacted by this is
the Lawn and Garden business and it’s really this mismatch between the
historical pricing mechanism and this volatility that we have in resin costs.
Christopher Butler –
Sidoti & Company
I appreciate your
time. I’ll go back in the queue.
Operator
Thank you. Our next
question is from the line of Gary Farber with CL King & Associates. Please
proceed with your question.
Gary Farber – CL King
& Associates
Good afternoon.
Thank you.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Hi, Gary.
Gary Farber – CL King
& Associates
Hi. I have a couple
questions. Are you… the gross margins in the first quarter were around 24%. Are
you saying that that’s possible by the fourth quarter for this year?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I was talking
specifically in Lawn and Garden.
Gary Farber – CL King
& Associates
Okay. All right. But
even… it was 19% in the second and 24% in the first. Would it be fair to say
it would be in the middle for the balance of the year? Is that a fair way to
look at it?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Are you talking…?
Gary Farber – CL King
& Associates
Total gross margins.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
You’re talking for
the company?
Gary Farber – CL King
& Associates
Yes.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Yes. I think that’s
fair.
Gary Farber – CL King
& Associates
Okay. And on the
Engineered Products business, even if the… would you expect sequentially during
the balance of the year that that business… the aggregate level for revenues is
going to be better from where you were in the second quarter?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Could you… do you
mean do you think sales are going to be a little bit higher than they were in
the first half?
Gary Farber – CL King
& Associates
Yes.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I think they’re going
to be about the same.
Gary Farber – CL King
& Associates
About the same. Okay.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I don’t… we’ve been
on pretty fast pace of growth in that segment in the first half and I think
that the pace of growth is going to not be… certainly, not as fast in the
second half of the year as it was in the first.
Gary Farber – CL King
& Associates
Great. And then also
on the free cash flow profile, can you talk about what CapEx is? What it was
for the first half of the year and where it might end up for the year?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Yes. CapEx so far
year-to-date is about $9.3 million.
Gary Farber – CL King
& Associates
Okay.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
And we anticipate it
to be in the range of $20 million to $25 million.
Gary Farber – CL King
& Associates
$20 million to $25
million. Right. And through the first six months, you’d be free cash flow
positive if you took this cash flow from operations less CapEx?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
We’re just under.
Gary Farber – CL King
& Associates
Just under. So how
should we think about the back half of the year then?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
I think in the back
half of the year, we’re going to be positive.
Gary Farber – CL King
& Associates
Okay. All right and
then just lastly on this Lawn and Garden segment, as the dynamic changes on
pricing and things like that and how the things get… the costs get passed
through, from the outside, how should we track that? How will we know that
things are changing or getting better? Are there any data points that we
should watch?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
I think the best data
point for us would be on the margin side. As you look to price increases,
mechanisms coming in… what we’re hoping to do is get a more… less volatile
gross margin line based on resin. So if were able to get all that in, you’ll
see less volatility and you’ll see its certainly in a short term having margins
getting into that 20 to 25 range.
Gary Farber – CL King
& Associates
Right.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Fairly consistently.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Right. The two big
drivers in that business are price and raw material cost and when we see
volatility in our margins, it’s driven by that, and I think you’re right. Looking
at those margins sequentially, you’ll see our ability to…
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
You’ll see them rising.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
…make the kind of change
we’re talking about.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
You’ll see less
volatility there.
Gary Farber – CL King
& Associates
Right. Okay. All
right. Thanks.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Thanks, Gary.
Operator
Thank you. Our next
question is from the line of David Leibowitz of Horizon Asset Management.
Please proceed with your questions.
David Leibowitz – Horizon
Asset Management
Good afternoon.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Hi, David.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Hi, David.
David Leibowitz –
Horizon Asset Management
A few unrelated items,
first, the increasing in your long-term debt. How did that arise?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
For the… go ahead.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
For the quarter, it’s
down.
David Leibowitz –
Horizon Asset Management
For the six months,
it’s appears to be up or am I misreading it?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Yes. For the first
six months of the year, we’re going to be up a little bit because we are cash
flow negative for the year.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Normally, David, we
do a lot of collections towards the end of the year. If you look at our
overall year-over-year, that’s pretty much the way our business runs.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Seasonally, we use
more cash in the first half of the year than we do in the back half of the
year. So what you’re seeing there is an increase in our debt borrowings in the
first half of the year.
David Leibowitz –
Horizon Asset Management
But that shows up on
the long-term debt line and I thought your borrowings were for the short-term.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
The long-term line
shows our credit facility.
David Leibowitz –
Horizon Asset Management
Okay. You’re taking this
then on the long-term to pay on the short?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
We’re using our
credit facility to pay for current working capital needs.
David Leibowitz –
Horizon Asset Management
Okay. Second
question, the acquisition Ameri-Kart made, you did not indicate the size of revenue
of the acquired entity, whether it is profitable or unprofitable, whether there
is an NOL that comes along with it, et cetera. Could you fill-in some of the
gaps?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Well, it’s a
technology, that’s what it is. It’s a… the manufacturing of the technology is
now something that we will endeavor to begin to make a particular product that
will go into the marine gas tank or fuel tank. So it’s not a company. What we
bought was technology, it’s a leading technology. We didn’t endeavor to put
the size on it yet because we’re still… there are certainly competitors in this
business and at this point, as the boat makers go to start producing next year’s
boats, they’ll have a choice of selecting our technology or a 20-year-old
technology. And we feel very strongly that what the EPA has mandated that the
only technology that will make any sense and lower the cost for the boat
builders is to use ours. So at that point, we’ll have a better handle on what
this means to us.
David Leibowitz –
Horizon Asset Management
And how much are you
paying for… did you pay for it?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
We didn’t
disclose the terms.
David Leibowitz –
Horizon Asset Management
Has the deal closed?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Yes.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
It is closed. It’s
all done. Signed, sealed, and delivered.
David Leibowitz –
Horizon Asset Management
There’s no document
we can find in SEC filings in other words that would tell us how much was paid?
David B. Knowles – Myers
Industries, Inc. – Executive Vice President and Chief Operating Officer
No, not right now.
But I would say that there are more details to follow. But it was a very… it
was not a major investment.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Under $1 million.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
All tolled, it will
be under $1 million but there’s earn outs in there based on the success of the
product so it’s hard to say exactly what we paid for it but the cash payments
would be… cash payments of what we know today is less than $1 million.
David Leibowitz –
Horizon Asset Management
And the last question
and it’s beating a dead horse at Lawn and Garden, but is your accounting there
LIFO or FIFO?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
It’s FIFO.
David Leibowitz –
Horizon Asset Management
Would it make a
difference if you were to convert to LIFO for the future? Would that have in any
way ameliorated the situation you encountered?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
I don’t think so. I
think—the swiftness of the increase in resin really wouldn’t have helped us. It’s
just kind of how the dynamics worked there. I think it really goes to what
David talked about in getting the mechanism straight, getting the pricing right
in this segment to make that issue less…
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
And if I could just add
to that, that would sort of address the timing of when that cost sort of appears
but I think the real issue is that the pricing gets established in the third
quarter and you’re dealing with changing raw material costs that can affect you
throughout the rest of the year and that’s the issue that we need to address.
I think the thing that we need to address is around that.
David Leibowitz –
Horizon Asset Management
Thank you very much.
Operator
Thank you. Our next
question is a followup from Chris Manuel with KeyBanc Capital Markets. Please
proceed.
Chris Manuel –
KeyBanc Capital Markets
Good afternoon again.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Hi, Chris.
Chris Manuel –
KeyBanc Capital Markets
Okay. So a couple of
more questions. One is you answered some of it regarding the piece that you
purchased. So it’s a technology, it’s not an actual product that it’s in the
market today.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
It’s not a product in
the market today but it will be because it’s the product that has to go in to
the fuel tank so that the automatic shut off works.
Chris Manuel –
KeyBanc Capital Markets
Are there other
applications for this product? You talked about marine. Is it something that
could be used in RVs? Is it something that we can use in ATVs or…?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Absolutely. Absolutely.
And we have rights to that at this point. The only thing we don’t have rights
to would be automotive.
Chris Manuel –
KeyBanc Capital Markets
Okay.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
The big driver to the
marine is the regulation… the EPA regulations that are going into effect that’s
driving the need for this use.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
So it’s causing the
boat builders, Chris, to have to redo every single boat design for next year.
It’s very expensive for them because the old system requires four valves whereas
this requires one valve and so one. There are a lot of intricacies to it but the
bottom line is it’s a significant savings for the boat builder to buy our
technology.
Chris Manuel –
KeyBanc Capital Markets
So if I… I don’t know
if you have any data that would suggest this. Do you know how much market
share you have in this today? How big of a market it is? Any color you can
provide us on that would actually be helpful.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Yes. I don’t have it
at my fingertips but there are probably 250,000 boats that will be built next
year that would be able to use this technology. We seriously think that most
boat builders would want to go with this technology.
Chris Manuel –
KeyBanc Capital Markets
Is this a large
market for you today were talking about? Is this something that’s $20 million
to $30 million in revenue or…?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
No. No, it’s not.
What we think is it’s going to be a growth market and just as you talked
earlier, there are other applications for this besides marine. I guess the EPA
in making this mandatory for boat builders, I’m sure that as we continue on in
time that other manufacturers like for RVs or for ATVs and so on will require
this technology in the tanks. And keep in mind, we make the tank, too.
Chris Manuel – KeyBanc
Capital Markets
Right.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
That’s a critical
item here. Not only do we do gas tanks but it also lead us then into… if a
boat builder is going to switch to our tank with this technology for fuel, they
might also be interested in switching for live wells or potable water tanks and
so on that we also produce.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
If I can just add to
that.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Yes.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
The Ameri-Kart
business acquired this has a strong position in RV and not a stronger position
but fairly a small position in the marine market. And we think the benefit of
this technology is that we’ll be able to sell this technology into the marine
market but it also can be sold associated with tanks and expand our sale of rota
(ph)-molded tanks into the marine market as well. That’s really the… kind of the
whole process behind that acquisition.
Chris Manuel –
KeyBanc Capital Markets
That’s helpful.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
And then to markets
outside of marine as they demand similar… similar fix up.
Chris Manuel –
KeyBanc Capital Markets
That’s perfect. That’s
what I needed there. The second question… two other questions I have. One is
we can switch gears and flip over to Material Handling for a second. It’s
notable that your profit is up a little bit year over year, I think you guys had
previously discussed anticipating, if memory serves, is $13 million to $15
million or $13 million to $16 million of cost savings with a portion of those
this year. How were you tracking with that? Do you have any updates as to
what you would anticipate 2010 versus 2009, those kinds of things, with respect
to cost savings and such?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I think we’re pretty
much on track towards that $13 million savings projection that we had projected
for the full year and I’d say we’re roughly about half of that through the
first half of the year. And I think that we’re finding very good results from
the project. Some of those savings come from real business improvements and
efficiency improvements in the plants. Some of it comes from the restructuring
and closing of plants and the associated cost reduction with that but it’s… it
continues as we had planned and expected.
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
And if I could add,
the upsize of that is going to be as volume comes back in that legacy business,
in that Buckhorn business and Akro-Mils business, it only enhances the savings
because of the increase in productivity that we’ve established through this
project.
Chris Manuel –
KeyBanc Capital Markets
That’s helpful. And
then the last question is, I’m going to come back to Lawn and Garden business
again for a second but historically, pre-ITML days, that business would run at
a neighborhood of 10% margin in 2002, ’03, ’04, ’05, you were give or take in
that range. What does it… and even if I look in 2009, it was north of 11%.
What… I guess these contracts have always been this way. So outside of
contracts, what does it take to get margins back to better rates or
directionally where you used to be? Can some of that be done by restructuring
some contracts or is there anything else structurally strategically that needs
to take place?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
I can comment on that
a little bit. If you look at our… the volatility of our margins quarter by
quarter, it’s always been there but not quite as dramatic as what we saw in the
second quarter because of how the resin increases flowed to us and the timing
of that but we’ve always had that volatility in the second and third quarter
with first and second being the strongest quarters for us. The change that we’re
looking at doing here is going to decrease that volatility certainly. And I do
believe that we’re going to get to… if you look at gross margins, the gross
margins of 22% in the first quarter, we are going to approach that 24% to 25%
range by the fourth quarter and I think that the mid 20s is somewhere where we’re
going to be in the short term while this whole thing gets sorted out
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
And maybe if could
just add. What did change was the volatility of resin cost and that’s where
the real fix to this issue is in structuring and how do we deal with that in
the marketplace. If we set that aside say with respect to Lawn and Garden
business, we feel that there is a substantial opportunity for us to improve our
position in the Lawn and Garden market. We have the initiatives that I spoke
to earlier are gaining momentum in our ability to serve customers. We are
developing our targets at specific markets with some of these new
technologies. We’re bringing in some new decorative pot technology and
introducing in the second half of this year. So we’re building on a series of
actions that should be improving our position in the Lawn and Garden market
over time. Again, that’s setting aside this volatility. We now have to fix
that volatility through how we deal with that in the marketplace.
Chris Manuel –
KeyBanc Capital Markets
I have to believe that…
you’ve got a number… you’ve been the largest guy in this sector for… by factor
of at least two or potentially three for the last several years. And, if
memory serves, some of those other competitors were much smaller and also
pretty well extended in leverage and if you’re struggling with materials at
this point, I got to believe maybe some of those guys aren’t in existence.
Could you maybe give us an update on what the competitive landscape is like in
the Lawn and Garden business and then if you don’t mind and talk a little bit
about the Material Handling business as well?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I think that the
first thing I would say is we aren’t the only players in this industry that had
experienced this issue and experienced this dramatic rise in raw material
cost. So our competitors are certainly suffering from these issues as well
although our competitors aren’t public companies reporting this in the public marketplace.
I can’t speak of competitors that have gone out of business at this point because
of that but I know that it has had an impact on them. It’s my belief that as
we work to change the way we deal with this resin volatility in the market that
were not the only ones who are going to be working to try to do this.
I wouldn’t say there are
other major changes in the competitive landscape that we’ve seen in the last
few quarters. There continues to be two things that are trends. One is the
growth and acceptance of the co-extruded pots through the thermoforming process
and there continues to be decorative pots sold into the grower market that have
come from overseas. And I think both of those trends we now have key
initiatives and we’re tracking against driving our business to be a winner as
those trends develop.
Material Handling, I
would say not a major change that we can see in our competitive landscape over
the last two or three quarters as well. Material Handling companies aren’t
immune to this resin cost increase so I think that were seeing behavior in the
marketplace that is consistent with what we would typically expect to see.
What I can say in the Material Handling business though is we have… we
introduced new products at the end of last year. We’ve continued into this
year introducing new products in our storage bins line and we have been filling
the pipeline with some new innovations in the returnable container line. I
think the real story for that business over the next couple of years is going
to be driving that business to more innovations and new product introductions
and we think that that’s kind of the future for those two businesses.
Chris Manuel –
KeyBanc Capital Markets
And then the last
question I had was… as you think about the return profile of some of these
investments and things you’re making, can you speak a little bit to what you
anticipate with a return profile? How you think about that return on capital?
Donald A. Merril –
Myers Industries, Inc. – Vice President and Chief Financial Officer
Our return profile
has remained the same. Actually, we’ve kind of increased it. We look at
things in a couple of different ways but one way to look at it… one way we do
look at it is in on an ROIC basis. And that target for us is between 15% and
20% and that target remains the same.
Chris Manuel –
KeyBanc Capital Markets
And these new
projects are meeting those hurdles?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
These new growth
investments that we’re talking about are all targeted to meet or exceed those
hurdles.
Chris Manuel –
KeyBanc Capital Markets
Okay. Thank you,
gentlemen. Good luck in the quarter.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Thanks, Chris.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Thanks, Chris.
Operator
Thank you. Ladies
and gentlemen, with no further questions in the queue, I would now like to turn
the conference back to Mr. Max Barton.
Max Barton – Myers
Industries, Inc. – Director of Investor Relations
Thanks, June. We
thank everybody for your time and as a reminder we’ll have a transcript of this
call available on the Myers website in approximately 24 hours and the replay is
immediately available via webcast or call from the Myers site under the Investor
Relations tab. Thank you all and have a very nice day.
Operator
Thank you. Ladies
and gentlemen, this concludes today’s teleconference. You may disconnect your
lines at this time. Thank you for your participation.
