Transcript of
Myers Industries, Inc. (MYE)
Q2 2012 Earnings Conference Call
July 19, 2012
John C.
Orr, President and Chief Executive Officer
David B.
Knowles, Executive Vice President and Chief Operating Officer
Donald A.
Merril, Senior Vice President, Chief Financial Officer, and Corporate Secretary
Monica
Vinay, Director of Investor and Financial Relations
Operator
Greetings and welcome
to the Myers Industries’ Second Quarter 2012 Earnings Conference 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 your host, Monica Vinay, Director of Investor Relations. Thank
you, you may begin.
Monica Vinay – Myers
Industries, Inc. – Director of Investor and Financial Relations
Good morning and welcome
to the Myers Industries’ Second Quarter 2012 Earnings Conference Call.
I’m Monica Vinay, the
Director of Investor Relations at Myers Industries. Joining me today are John
Orr, President and Chief Executive Officer; David Knowles, Executive Vice
President and Chief Operating Officer; and Don Merril, Senior Vice President,
Chief Financial Officer, and Corporate Secretary.
Earlier this morning,
we issued a news release outlining the financial results for the second quarter
of 2012. If you have not yet received a copy of the release, you can access it
on our website at www.myersindustries.com
under the Investor Relations tab. This call is also being webcast on our website
and will be archived there along with the transcript of the call shortly after
this event.
Before I turn the
call over to management for remarks, I would like to remind you that we may
make some forward-looking statements during the course of this call. These
comments are made pursuant to the Safe Harbor 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 company’s periodic SEC filings and may be found
in the company’s 10-K filings.
I am now pleased to
turn the call over to John Orr, President and Chief Executive Officer. John?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Thank you, Monica,
and good morning. It’s a pleasure to have all of you join us.
Before discussing our
second quarter, I’d like to comment on our recent acquisition. As you probably
know, on July 9th, we announced that we acquired Plasticos Novel Do
Nordeste S.A. or simply Novel for short. As previously reported, the purchase
price was $27.5 million subject to certain post closing adjustments. Novel’s
projected annual sales for 2012 are estimated to be approximately $38 million.
We financed the purchase through the drawdown of our line of credit. Novel is
one of Brazil’s leading designers and manufacturers of plastic totes and crates
used for closed-loop shipping and storing in the region’s fast growing food and
agricultural industries. Novel also produces a diverse range of plastic
industrial safety products. It operates from two manufacturing facilities, one
is located in the state of Parana in the south of the country and one is
located in the State of Bahia in the fast growing northeast. And, of course,
our Myer’s do Brasil operation is in Jaguariuna, just north of Sao Paulo in the
middle of the country.
An overview of the
acquisition is located on slide 3 of the presentation. Novel maintains very
strong relationships with industry-leading international companies and is
highly regarded for its innovation, quality, and service. Novel also
complements our existing Material Handling business in Brazil which produces
bulk containers, pallets, and totes for the agricultural, automotive, and
manufacturing industries in the region. The acquisition clearly fits our
Material Handling segment strategy which includes geographic expansion in North
and South America, growing our more profitable end markets, and leveraging our
strong existing position.
Our strong balance
sheet and free cash flow generation enables us to take advantage of these types
of attractive bolt-on acquisitions. Novel will be included in the Material
Handling segment’s results beginning in the third quarter.
Okay. Let’s turn to
slide 4 of the presentation. Net sales increase 2.2% to $181.1 million
compared to $177.3 million in the second quarter of 2011. The significant
sales increase in our Engineered Products Segment combined with a moderate
sales increase in our Lawn and Garden Segment more than offset anticipated
softer sales in our Material Handling Segment and a sales decrease in our
Distribution Segment. Don will provide more detail around these variances.
Gross margin increased
to 26.2% compared to 25.1% in the second quarter of 2011. Productivity
improvements generated by our operations excellence initiatives cost reductions
were the key drivers of the year-over-year increase.
Net income for the
quarter was $5.7 million or $0.17 per diluted share compared to net income of
$4.7 million or $0.13 per diluted share in the second quarter of 2011. On an
adjusted basis, which excludes restructuring costs and other special items, our
earnings per diluted share in the second quarter were $0.17 compared to $0.14 in
the second quarter of 2011.
I will now like to
turn the call over to Don Merrill, our Chief Financial Officer, who will
provide you with the details regarding our financial results. Don?
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
Thanks, John. Good
morning, everyone.
I will comment first
on the overall financial results which are summarized on slide 5 of the
presentation. Then I will review the results by business segments. I will
only review the items on slide 5 that John hasn’t already discussed.
SG&A expenses in
the second quarter of 2012 were $37.4 million compared to $35.8 million in the
second quarter of 2011. The increase in SG&A quarter-over-quarter was
driven primarily by increased compensation costs including medical expenses as
well as higher freight costs in our Lawn and Garden and Distribution Segments.
The higher freight costs were mainly due to shipping inefficiencies that will
be remediated by the end of the year.
Our effective tax
rate during the quarter was 36.7%. We anticipate that the effective rate for
the full year 2012 will be in the range of 38%.
Cash, as of June 30,
2012 was $35.6 million compared to $6.8 million as of December 31, 2011.
The increase in cash took place primarily because the company drew on its line
of credit right at the end of the quarter in order to position funds for the
acquisition of Novel in early July. The offset to the increasing cash is
captured in long-term debt which increased from $73.7 million as of December
31, 2011 to $101.8 million as of June 30, 2012. At June 30, 2012, debt net of
cash was $66.5 million compared to $67.2 million at the end of 2011.
Cash flow provided by
operating activities for the six months ended June 30, 2012 was $7.9 million
compared to $8.8 million in the same period of 2011. Capital expenditures
totaled $8.4 million for the six months ended June 30, 2012. We estimate that
capital expenditures for the full year 2012 will be approximately $30 million
and about 50% of those projects will be growth oriented.
As John mentioned, on
July 9, 2012, the company announced that it had completed the acquisition of
Novel. The purchase price was $27.5 million subject to certain post-closing
adjustments. The results of Novel will be integrated into our Material
Handling Segment effective July 1, 2012.
Now, let’s turn to
our business segment and their performance as summarized on slide 6 through 9
of the presentation. Results are compared to the same period in 2011. I will
be referencing the adjusted pretax income information by segment as it appears
on the reconciliation of Non-GAAP financial measures included at the end of
slide presentation and in the earnings release issued earlier today.
Let’s begin with the
Material Handling Segment shown in slide 6. Net sales for the second quarter
were $60.3 million compared to $67 million in the second quarter of 2011. The
lower sales in the second quarter as compared to last year are mostly the
results of a foreseen delay in customer orders from the second quarter of this
year to late in the second half of this year as we mentioned in the first quarter
earnings call.
Adjusted income
before taxes in the Material Handlings Segment was $9.2 million in the second
quarter of 2012 compared to $8.4 million in the second quarter of 2011.
Despite lower sales, the segment generated increased income as a result of
productivity improvements generated through our operations excellence initiatives
combined with lower manufacturing costs during the quarter.
If you turn to slide
7, you’ll see that net sales in the second quarter in the Lawn and Garden
Segment increased to $42.5 million from $41.8 million in the second quarter of
2011. Although sales increased year-over-year, they were softer than we
anticipated as customers chose to continue to deplete their inventories during
the quarter and also limit production for a second planting.
The adjusted loss
before taxes in the Lawn and Garden Segment was $1.5 million in the second
quarter of 2012 compared to a loss of $1.6 million in the second quarter of
2011. The income generated by the sales increase was partially offset by
higher freight costs during the quarter which resulted in only a slight
improvement in operating results year over year.
Please move to slide
8. Net sales in the Distribution Segment decreased to $44.2 million in the
second quarter of 2012 compared to $46.1 million in the second quarter of
2011. The decrease in sales is due to softer customer demand during the
quarter that was driven by decreases in both replacement tire sales and miles
driven.
Adjusted income
before taxes in the Distribution Segment was $4.1 million in the second quarter
of 2012 compared to $4.5 million in the second quarter of 2011. The lower
sales volume as well as higher freight costs during the quarter led to the
decrease in income before taxes year over year.
On slide 9, you’ll
see that net sales in the Engineered Products Segment were $38.6 million in the
second quarter of 2012 compared to $27.9 million in the second quarter of
2011. Strong sales driven by a year-over-year rebound in the transplant auto
market combined with sales increases in the recreational vehicle, marine, and
custom markets generated the 38.5% increase in sales during the quarter.
Adjusted income
before taxes in the Engineered Products Segment is $4.7 million in the second
quarter of 2012 compared to $2.7 million in the second quarter of 2011. This
significant sales increase as well as the lower costs resulting from the
execution of our operations excellence initiatives drove most of the 74%
increase in income.
That concludes the
financial review. I’ll turn the call back over to John for some summary
remarks. John?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Thanks, Don.
Please turn to slide
10 of the presentation.
During the second
half of 2012, we expect the following in each of our segments:
In our Material
Handling segment, results should benefit from the shift in demand from the
second quarter to late in the second half of this year in the higher margin
food processing and agricultural markets.
Because inventory
throughout the channel has been depleted in the Lawn and Garden segment, we are
seeing stronger order activity as customers prepare for the next season. We
believe that this combined with lower costs resulting from our operations
excellence initiatives will lead to improved results in the second half of this
year.
In our Distribution
Segment, performance may continue to be impacted by declines in replacement
tire sales and miles driven. However, we have not incorporated into this view
the potential benefit from the recent small decline in gasoline prices.
In our Engineered
Products segment, we anticipate continued strength in the marine market as a
result of further customer conversions to our EPA-approved fuel system,
Enviro-Fill. We also expect the demand in the transplant auto market will be
at more normal levels during the second half of 2012. In other words, the
average quarterly demand in the Engineered Products Segment in the second half
should be lower than was the case in the second quarter.
While we anticipate
continued headwinds resulting from the mixed economy, we believe that our
results in the second half will benefit from our operations excellence program
as well as the shift in orders in the Material Handling Segment in the second
quarter to the fourth quarter of this year.
We expect our full
year results to reflect another year of successful execution of our strategic
objectives.
That concludes
management’s presentation. I’d like to turn it back over to Monica so we can take
her questions.
Monica Vinay – Myers
Industries, Inc. – Director of Investor and Financial Relations
Thank you, John.
The operator will now
direct the Q&A phase of the presentation. As a reminder, please keep in
mind that in addition to John and Don, David Knowles, our COO, is also
available to answer questions. Go ahead please, Christine.
Operator
Thank you. We will
now be conducting a question-and-answer session. If you would like to ask a question,
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.
Thank you. Our first
question is from Chris Manuel with Wells Fargo Securities. Please proceed with
your questions.
Chris Manuel – Wells
Fargo Securities
Good morning and congratulations
on a good quarter.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Thanks, Chris.
Chris Manuel – Wells
Fargo Securities
A
couple of questions for you. First, if I could center a little bit around the
Novel acquisition. As you put that together with your current business, what
types of opportunities or synergies do you envision? Are there any financial
synergies or any product synergies that you can take from what obviously is a
much, much, much bigger business here in North America and some stuff down
there? Are there some things potentially from South America you could
anticipate bringing up here? I saw some interesting products that look like
they may or – so how do you look at the opportunity and the opportunity for
growth coming out of that piece? And then, Don, as well, if you could provide us
some of the – I think you gave us some revenue numbers, a sense as to maybe
either a multiple paid or what you anticipated for 2012 EBITDA and things of
that nature?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Chris,
this is John. Let me start first with talking about synergies and certainly
there are synergies in this deal. We’re going to go slow in taking the effect
of these synergies because we want to make sure that we do it right, but some
of the items would be, of course, SG&A costs. One of the things that
Novel, does very, very well is material recycling. In fact, virtually 100% of
the material they use is recycled. They do that onsite in both of their
facilities. There are some technology opportunities there that we expect to
learn from and take advantage of here in the US. Certainly, there’s potential
plant consolidation down the road but, again, as I said, it’s best to take this
slow and make sure that we do it correctly. We have a good team on the ground
in Brazil. We have a good team operating our Material Handling Segment here in
the US and working together, they’re going to make some opportunities out of
that.
And
I think, finally, from a customer standpoint, there are major customers that
Novel deals with especially in the beverage industry and in the ag industry in
Brazil. There are, in some cases, same customers that we have in the US, so we
see some real opportunities there from a product standpoint. And then I think,
in addition with the larger products that we make at Myers do Brasil currently,
the pallets and bulk boxes, we certainly see some opportunities down there in
the beverage industry around plastic pallets to replace wood pallets.
So,
all in all, I think there’s a tremendous amount of opportunities. We didn’t do
this quickly. It took us almost a year to make this acquisition to be sure
that it was right. I think the team did a great job of putting the acquisition
together and so, from that standpoint, I’m really, really excited about what we’ve
done in Brazil.
I’ll
turn it over to Don to kind of answer some of the other questions that you
have.
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
Yes,
Chris. I would say the – if we just want to talk about operating margins for a
second within the acquisition, I would say that the operating margins currently,
before any of the things that John just talked about are in place, are about
the average of our Material Handling Segment. So there’s a lot of products and
businesses that you know that are in there so I would say that this is about
average and I would say, as we watch the dust settle from a purchase accounting
standpoint and so on as far as the multiple goes, I would say we’re somewhere
between the four and five range.
Chris Manuel – Wells
Fargo Securities
Okay.
That’s sounds very attractive. And then the next question I had was actually
for David, if – frequently, you talked to us about new products, things of that
nature, so if you could – I guess I have two questions for you. First, if you
could run us through – maybe where some of the volumes were by your – what you
felt organic volumes were to your different segments – you gave us some up or
down kind of directional stuff, but if you could be maybe a little more
specific and then also talk to us about progress in the new product
initiatives.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Sure.
Yeah. I think to start with organic volume, our overall organic volume sales
growth was slightly up in the second quarter. We were down in just into the
double digits in the Material Handling business, in the low single digits in
the Distribution Business, we were up slightly as you saw in Lawn and Garden, and
we’re up substantially in Engineered Products well into the double digits which
is a perfect quarter for that business. And that’s a trend that’s by and large
has been in place for the first half of this year. In terms of new products, I
think you’d recall we set a target for products introduced in the last three
years or sales as a percentage of our total revenue from products introduced in
the last three years. We’ve been moving up a track, getting over 5% of our
sales from new products. We’ve definitely come into that range in the second
quarter and in the first half of this year so we’re over 5%. I think we’ve
mentioned before our stretch goal over the next couple of years to get
ourselves to 10%; we’re not in that range yet. We’re getting into a range
where we think it’s bringing some real benefit to the business though. As we
go forward, some of the products will drop off after three years and we have to
replace them and add and so we’re getting into the high single digits and I
think we’re tracking reasonably well according to our plan.
Chris Manuel – Wells
Fargo Securities
Is
there anything – if I can just dig a little deeper, is there anything in
specific areas where you’re seeing more activity than other specific segments,
specific-type products, that are some big wins or some new stuff that may be
recently commercialized, things of that nature?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I
would say that there isn’t any single product, particularly in the second
quarter, that rings a bell for the whole company and I look at that as good
news. It’s a fairly diverse program that we have. A couple of highlights, the
Material Handling business did quite well in the second quarter. Two areas of
note, one is a distribution tote in our Akro-Mils business has really started
to come on in the second quarter and we expect that to follow through for the
rest of the year. It’s a very good product for us. In the Material Handling –
the Buckhorn business has continued to grow in the non-tomato paste liquid
returnable packaging area with our IBC product line and we are having continued
strength in – let’s call it nontraditional markets with that product and that
certainly helped us in the second quarter. Interestingly, the Distribution
business continues to make good progress in some of the fairly unique products
that it’s bringing to the market. We’ve got I think a TPS product – our TPMS
product that’s really making some nice ground in the second quarter as well.
Chris Manuel – Wells
Fargo Securities
Okay.
That’s helpful. And then, maybe Don, if you could – you updated the tax rate
and I think you gave a CapEx number. Do you have an updated D&A number? I
don’t know if there’s extra stuff that’s going to roll on for half a year of
acquired stuff or not.
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
No,
there’s really no update to the last number we gave you.
Chris Manuel – Wells
Fargo Securities
I
forget what the number was again. Can you refresh my memory?
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
Yes,
it’s about $36 million.
Chris Manuel – Wells
Fargo Securities
Okay.
That’s helpful. And then, last question with respect to other activities and uses
of cash. Having completed an acquisition here in the quarter, are you still – and
I know that’s been the primary focus for finding good properties to tuck in the
portfolio. Are you still in the market? Does having completed this one sort
of kind of pause the situation? Could you may be kind of go back through,
John, the priorities for cash as you see them?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Well,
again, Chris, we’re always open to look at enabler and bolt-on type
acquisitions. An enabler like Enviro-Fil has been very successful. A bolt-on
like Novel we think is also going to be very successful. We’re going to continue
to look for opportunities but as well, we’re also going to continue to utilize
our cash to improve our shareholder value. So nothing has really changed with
respect to how we use cash. We’re going to continue to maintain the current
business. We’re going to grow stakeholder value through new product
development. Growth capital is the target of an ROIC probably north of 15%. Of
course, process improvements and acquisitions go with that. And we will return
capital to stakeholders through debt reduction, continue paying dividends, and
the possibility of share repurchase if the share price is in the right vein.
So I think that’s a pretty succinct answer to your question.
Chris Manuel – Wells
Fargo Securities
Okay.
Thank you.
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
Hey,
Chris. It’s Don. I misquoted the number. The depreciation amortization
forecast for the full year, I think that number that I’ve quoted in the past was
$34 million, not $36 million.
Chris Manuel – Wells
Fargo Securities
I
think you’re right. I channeled back on this one. Okay. So $34 million.
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
Thanks
for not correcting me.
Chris Manuel – Wells
Fargo Securities
I
don’t remember what it was until you said it then I went back and I looked.
Okay, so $34 million. That’s helpful. Thank you, guys. Good luck.
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
Thanks.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Thanks,
Chris.
Operator
Our
next question comes from the line of Adam Josephson with KeyBanc Capital
Markets. Please proceed with your questions.
Adam Josephson –
KeyBanc Capital Markets
Good
morning, everyone.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Hi,
Adam.
Adam Josephson –
KeyBanc Capital Markets
A
couple of questions to you guys. You mentioned previously that last year’s
sales mix in Material Handling was unusually favorable which resulted in your
13% EBIT margin. Now you’re on pace to generate margins in that business
substantially higher than last year’s. What level of margin improvement is
reasonable to expect in this business in the quarters to come and why?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
This
is David. I’ll address that one and I’m glad you mentioned that. You do
recall that after the second quarter of last year, we said we experienced a strong
mix in the second quarter of last year and I think we’ve also said that we have
a timing issue on orders in the second quarter of this year and I’m sort of
addressing demand right now. We expect those to fall for us later in the year,
I think into sort of late in the year this year, as customers are asking us to
bring product to them more in time with the seasonality of their business and
we are working to make that happen so we help grow that part of the business
which has been a good business for us. And that did have a positive impact on
us in the second quarter of last year. This year, the margin improvement has
been driven by three things in Material Handling, material costs, projects that
we continue to work on to find ways to bring material costs down with the use
of alternative materials, productivity and – in the second quarter this year,
we had a substantial improvement in our productivity versus our plans because
some programs are really delivering for us. And the third, and I think the
thing that’s really driving – we expect stronger margins in that business is
just looking at the business and making sure that the product and sales that we’re
driving to our assets are valuable to us. So we have been upgrading the mix of
what we sell through our Material Handling business as we go forward and it
means that some of the products and sales that we’ve had in the past that are
not as valuable, we’ve either foregone or taken the risk to try to upgrade the
profitability of it. And I think that’s some of what you’re seeing flow
through in the second quarter and we expect to continue to do that. Of course,
the comps on this are going to get much harder as we go forward. We’ve made a
lot of grounds and we expect that aside from some fluctuations here and there,
we can maintain the ground but the comps are going to get much harder on these
three things because we’ve had some very good success with that through now.
Adam Josephson –
KeyBanc Capital Markets
All
right, now, I got it. How much capital do you expect to invest in Lawn and
Garden this year and next and what gives you confidence that you will receive
an adequate return on that investment given this business’ struggles?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
So
this is David again. I’ll address that one and maybe address the broader
issues as we go. We are investing less than our depreciation in the business.
It’s really oriented toward maintaining our position in the business and
maintaining our competitiveness in the business. Much of our focus in
investments around the business is oriented toward driving cost out, driving
productivity, and making that a competitive business. It’s not a business
we’re expected to try to invest to grow substantially. And I think there’s a –
the broader point around Lawn and Garden is that it’s a business clearly in our
portfolio that’s not earning its cost of capital. So we have a pretty intense
focus because from the long-term view of Myers Industries, we don’t want that.
We don’t want to have that in our portfolio so we are clearly taking action on
three dimensions to address that. The first dimension is the one that we’ve
been talking most about, which is substantial productivity improvement, cost
reduction, and market repositioning within the business, and we’ve made
significant strides on that and I think, with volume, those would get us to
earning our cost of capital. So as you see in the second quarter, volume isn’t
necessarily solving that issue for us so we have to look at another dimension
which is deeper restructuring available to us in the business and we are
looking at that very seriously right now. And then ultimately the third
dimension is looking at the broader industry and externally and is there a solution
to this business externally. We’ve got a difficult industry structure. Is there
a solution to that? Ultimately, you have to look at how does that business fit
in our overall portfolio and what I would say is we are looking deeply at all
of those issues right now and it’s our commitment as part of Myers Industries
that we’re going to make the right decision on those things, I think
importantly, at the right times to make those decisions, to get them – to get
it addressed and have this business at Myers Industries fit the expectations of
our shareholders.
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
Adam,
this is Don. The only thing I’ll add to that was the second part of your question,
how do we know what the capital is going to return – how are we going to get an
adequate return and I can assure you that there’s a very rigorous process
around how we decide when and where we spend our capital in all of our
businesses but certainly that would apply to Lawn and Garden.
Adam Josephson –
KeyBanc Capital Markets
Thank
you, Don and David, for that. One more broadly, the company’s gross and EBIT
margin have been volatile in recent years and now you’re running toward the
high end of your historical range. Can you give us a sense of what you think
the sustainable margin structure for this company is and why?
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
Yeah,
I think, like David said, I’ll kind of use what he used a couple of times here
when we talked about margins and we are getting to the historical highs at the
end. For example, in the Material Handling, we are looking at getting very
close to our high watermarks back in the 2006 and 2007 range when we were
between 14 and 16. So we are pushing that. I think that our operations
excellence initiatives, our move for mix management both on a customer and
product level have helped but as we get closer to gross margins pushing 30%
that is probably at the high end of it and then what’s going to happen is
you’re going to see the other pieces of the strategic plans start kicking in.
Right now, you’re going to see the growth and the innovation start hitting
where we’re replacing some of our products with higher gross margin niche
products, et cetera, but the growth that you’re going to see is going to be a
lot slower. What you’ve seen over the last eight quarters is the sequential
increase in our gross margins quarter over quarter, right? If you look at the
Q2 here versus Q2 of last year, we’re up 110 basis points but if you were to
look at the last seven quarters as well, you would see that same type of
growth, in fact, you’d see greater growth. So we’re starting to get to the
point where it’s difficult to continue to comp that. And the next phase of the
strategic plan kicking in, as David talked about, as we really start seeing
this growth in innovation take over. That’s how we’ll see more growth in the
margin.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
And
then I would just add that we’re trying to take some of the historical
volatility out. We’ll still have some volatility but we’ve had more historical
volatility because of seasonality and because of resin price volatility. And
it’s the resin price volatility we’re trying to manage or at least minimize the
impact of that in our margins.
Adam Josephson –
KeyBanc Capital Markets
That’s
helpful both of you. Thank you. And just last one on – back to Lawn and
Garden. This is a general market environment. Was, again, consumer sentiment
or weather the bigger problem in the second quarter as far as you know?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I
would say there were – consumer sentiment was a problem. There were really two
factors that drove Lawn and Garden sales not strengthening as quickly as we
would have like them to strengthen. The first is because of the really difficult
season last year, small and mid-sized growers we found did not make speculative
planting this year. I think we talked about a second planting or second turn
that was just much weaker planting that went into that despite actually we had
a good season from a weather standpoint. But it was really a conservative
approach that the small and mid-sized growers took. As a result of that,
distributors took a much more conservative position and depleted their
inventories much more significantly than they have in the past and that caused
the inventory through the channel to deplete pretty well and growth to be or the
sort of sequential growth to be lower than we had expected.
The
second driver is consumer sentiment, which you mentioned, and we see that show
up in reports that sales of the big box stores this year were down and varying
across the different big box stores but sales through their garden centers were
slightly down and I think that that is just reflective of a more sluggish
general economy. And I think those two things really offset what we’re
expecting to be the positive which was a really favorable weather pattern this
season. Now we think we’ve kind of gotten through the challenges on the
inventory and the challenge from the weak season last year and our second half
should start to show stronger comparison versus – as people start to prepare
for the next season but this conservative approach that small and mid-sized
growers had had a real impact on us.
Adam Josephson –
KeyBanc Capital Markets
Well,
David and Don, thank you for all that. I appreciate it.
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Thank
you.
Operator
As
a reminder, ladies and gentlemen, if you would like to ask a question, press *1
on your telephone keypad. Our next question comes from the line of Christopher
Butler with Sidoti & Company. Please proceed with your questions.
Christopher Butler –
Sidoti & Company
Hi.
Good morning, everyone.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Hi,
Chris.
Christopher Butler –
Sidoti & Company
Staying
on the same topic of Lawn and Garden, I think that the difficult growing season
for crops is getting a lot of publicity right now. Is there any risk that that
would have an impact looking into your 2013 season as the plants just don’t
develop as they’re supposed to over the course of 2012?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
No.
Well, go ahead, Dave – well, everything that’s growing is growing in a
greenhouse so it’s protected from elements. It’s irrigated. That’s the whole
part of the process and then even when they get to the big boxes and most
cases, the big boxes are making sure that they take care of it. You’ll
probably see people in there watering every day, fertilizing, and making sure.
So I don’t – we don’t think there’s any. David, do you think there’s any issue
with that?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
I
don’t think so.
Christopher Butler –
Sidoti & Company
Okay.
And using the same train of thought and shifting to Material Handling where
you’re expecting an improving demand environment for the fourth quarter out of
your ag business. I know there’s been a lot of talk of possibly farmers
plowing into their field at this point, not buying tractors, questions as to
whether they’re going to buy fertilizer. Do you think that there’s risk that
Material Handling gets hit by some of the same headwinds?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
It
doesn’t appear that way to us and I think the niche in the ag business that we
serve isn’t going to be as greatly impacted by that.
Christopher Butler –
Sidoti & Company
Looking
at the second quarter, can you give me an idea of raw material costs? How that
changed sequentially for you and expectations moving into the second half?
Donald A. Merril –
Myers Industries, Inc. – Senior Vice President, Chief Financial Officer, and
Corporate Secretary
Raw
material, we actually saw a little bit of a benefit in the quarter from resins
as resin dropped earlier in the second quarter and then it started to spike
right back up again here in June. So the schizophrenia continues on resin
pricing but we’re not going to see the big movement in resin affecting the
P&L because of the value pricing structure as part of our operations
excellence initiatives that we have in place. So raw material really is not
that big of a benefit or a subtraction to our margins these days. Going
forward, it does look like resin is going back up and we will price our
products accordingly to make sure that there’s a limited impact on the P&L.
Christopher Butler –
Sidoti & Company
I
appreciate your time.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Thank
you, Chris.
Operator
Our
next question is a followup question from Chris Manuel with Wells Fargo
Securities. Please proceed with your questions.
Chris Manuel – Wells
Fargo Securities
A
couple of questions – followup questions for you. First, if I could go back to
Material Handling business for a second and we talked about some products being
pushed out to later in the year. Could you give us an example of maybe a type
of product or something that might be that normally, as I think you had
indicated, would have seen earlier in the year, second quarter, third quarter
but it’s being more sequenced as a customer wants it that it might be late in
the year and so maybe if you could give us an example. And then second, if you
can give us a sense of – I mean just from looking at revenue dollars, it could
be 5 million to 10 million bucks so that’s something I guess that, if I
understand you correctly, you’re anticipating will move to the back half of the
year. It’s not something that’s going away. It’s just the timing issue within
the year. Is that fair?
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
Yes,
that’s fair. So as we look at the year overall, we think the Material Handling
business is in reasonably good shape even though it started the year and
particularly in the second quarter was a bit soft and this is that timing issue
that we’ve discussed since the second quarter of last year. And I’d rather not
be specific about products or customers, but I think I can maybe give you some
insights as to how this – we have really expanded our investment and focus on
the food and agricultural market in general and different products within that
market have different growing seasons. And as we are investing to really grow
that and pursuing customers and trying to better meet our customer’s needs,
customers are asking us to deliver products closer to when they need it and
we’ve been able to manage that a little bit differently in the past. But as we
grow, we’re finding ourselves working to get product to customers closer to
when they need it. So that’s been really the case here and that’s why we
expect to see stronger demand later in the year in preparation of that spring
growing season for some of our products. There are other products that their
seasonality is a little bit different than that but that’s the one that we’re
talking about specifically here.
Chris Manuel – Wells
Fargo Securities
Okay.
That’s helpful. And then the last two followups I have were – or maybe three.
Within the Engineered Products business that, again, we just saw terrific
levels, and I do remember if we were going to a year ago, we were probably an
aftermath particularly on the transplant side of potentially some of those
folks getting parts that had issues with tsunamis and things of that nature – or
not, sorry, tsunamis, but the earthquakes and things in that nature, is that
something that – could we have another quarter or two like that that is still
kind of catch up from a year ago or are we kind of back at a more normalized – the
big outperformance in revenue there, like you specifically in some of your
remarks you cited some Enviro-Fill stuff but I thought that was a much smaller
piece but I thought the transfer might be bigger. So if you could maybe give a
little bit more color into that?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
This
is John. Good question. It’s certainly slowed. It’s slowing down. It’s – if
you look at, say, automotive news every week, which I do, and track car builds,
you’ll see that the transplants are slowing down; they’ve caught up from the
tsunami. So that’s why we’re saying and what we said in our presentation is
that we won’t see the same kind of volume in the back half of the year as we
saw in the first half of the year.
Chris Manuel – Wells
Fargo Securities
Okay.
Last question is concerning Lawn and Garden. I appreciate David the color you
gave us with regard to the three dimensions that you’re evaluating the business
under and as we look back through the history of the business, obviously,
you’ve been much more profitable and the environment, quite frankly, had been a
bit different, too. There’ve been a lot of changes but with how things start
seemingly getting a little bit better, there’s been an element of business
related to that. Can you maybe kind of walk through what your anticipations are?
How that’s changed? I mean clearly this quarter, as you discussed the three
dimensions, there’s a new dimension that we have not heard before within areas of
options for you in that business. Can you maybe walk through what’s changed
with your thinking that would now bring a possible exit to that element of the
portfolio into the equation?
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Well,
let me take that and then David can – we’ll ham and egg it a little bit, Chris.
Chris Manuel – Wells
Fargo Securities
Sure.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Let’s
go back to 2007 when the Myers, of course, started with the Dillen brand, the
ProCal brand, and the Listo brand and, around 2007, things were pretty good in
this business. There was some over capacity in our major competitor. Because of
the over capacity situation, began to cut prices dramatically. So we took it
upon ourselves to help eliminate some of that over capacity and we felt like that
was the correct direction to take at the time. Obviously, things happened
during the eight, nine, ten years from an economic situation. And as you look
at it today, there still is an over capacity in the industry even though we’ve
taken a lot of that capacity out. So I think as we think about, and David said
it very well earlier, there are three or four different options that we can
take a look at. A very radical option would be certainly more capacity changes
both for ourselves and potentially for competitors. We’re just – we’re kind of
sharpening our sword and looking at all different options for the business.
We’ve made no decisions whether it’s an ongoing business or something else at
this point in time. But certainly, we have to be, I think, cognizant of the
economic situation and how this business looks moving forward. David, I don’t
know if you want to add anything to that or –
David B. Knowles –
Myers Industries, Inc. – Executive Vice President and Chief Operating Officer
No,
other than you asked what might have changed. I think this second quarter, we
expected growers to be more aggressive and bullish. And we found them more
conservative and just frankly, it is taking us longer based on that to drive
this back to where it’s earning its cost capital and so I think our commitment
is to get this business to where it’s earning its cost of capital. We’ll
consider all other options.
Chris Manuel – Wells
Fargo Securities
Fair
enough. Thank you.
John C. Orr – Myers
Industries, Inc. – President and Chief Executive Officer
Okay.
Operator
Ms.
Vinay, it appears we have no further questions at this time. I would now like
to turn the floor back over to you for closing or additional comments.
Monica Vinay – Myers
Industries, Inc. – Director of Investor and Financial Relations
Thank
you, Christine. We thank all of you for your time and your participation
today. As a reminder, a transcript of this call will be available on our
website within approximately 24 to 48 hours. A replay will be immediately
available via webcast or call. Details can be found on the Myers Industries
website under the Investor Relations tab. Thank you all for joining us and
have a great day.
Operator
Ladies
and gentlemen, this does conclude today’s teleconference. You may disconnect
your lines at this time. Thank you for your participation and have a wonderful
day.
