Spartech Corporation F1Q09 (Qtr End 01/31/09) Earnings Call Transcript

Spartech Corporation (SEH)

F1Q09 (Qtr End 01/31/09) Earnings Call Transcript

March 5, 2009 11:00 am ET

Executives

Myles Odaniell – President and CEO

Randy Martin – CFO

Analysts

Jason Miner – Deutsche Bank

Steve Schwartz – First Analysis

Eric Swanson – KeyBanc Capital Markets

Eugene Fedotoff – Longbow Research

Presentation

Operator

Good day, ladies and gentlemen and welcome to the first-quarter 2009 Spartech earnings conference call. My name is Francine and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Myles Odaniell, President and Chief Executive Officer. Please proceed sir.

Myles Odaniell

Thank you, Francine. Good morning and thank you all for joining us on Spartech's Q1 2009 earnings conference call. Randy and I welcome the opportunity to speak to you today regarding our current performance and progress on transforming our Company.

Today, I will focus on three major topics. First, our results in Q1 2009, concentrating on the primary driver of our performance, which was the dramatic slowdown in demand we experienced across nearly all of our businesses in November and December; second, completion of our previously announced $50 million initiative; and third; our intensified effort to further reduce our overall cost structure and accelerate our efforts to build a low cost to serve model and better position Spartech for the long-term. After my comments, Randy will then provide additional highlights and specifics on our quarter results and then we would both be pleased to take questions.

We continue to manage through a very challenging economic environment that has been negatively impacted by depressed demand in the end markets that we serve. Our seasonally weak first quarter was further impacted by broad-based customer shutdowns and de-stocking throughout most of November and December.

I want to state upfront that we are realistic about the economy and the challenging set of external conditions that we face, but as you will hear, there continues to be a great opportunity to improve our Company and better position Spartech for long-term success.

Now let me start with a summary of our first-quarter results. Net sales were $249 million compared to a $335 million in the first quarter of 2008, representing a decrease of 26%, which was primarily attributable to weak end-market demand. Sales volumes were down 32% in the first quarter of 2009 compared to the first quarter of the prior year, reflecting extended customer shutdowns and supply chain de-stocking in both November and December, along with significant underlying demand declines.

Despite the decline in sales volumes, operating losses, excluding restructuring and exit costs, were $1.8 million compared to $1.4 million in the first quarter of 2008, reflecting weak demand offset by the benefits realized from our financial improvement initiatives thus far. Our margins have fared well as we continue to realize steady progress with cost reductions, efficiency improvement initiatives, selling price increases and improvements in our overall mix.

We are clearly not satisfied with our financial results as much of the positive improvements are just partially offsetting the negative impact of the US economic recession. However, our progress to date and success with execution and structural improvement activities at Spartech provides us with the confidence that we remain on the right track. We believe achieving relatively flat year-over-year operating earnings as compared to the prior year with 32% lower volume is a testament to our resolve and ability to implement our strategy and execute earnings improvement initiatives.

Let me provide our high-level perspective on the external environment, which has presented some of the most challenging economic circumstances in the history of our Company. In the midst of the global credit and US housing and market crisis, consumers are clearly retrenching to weather the recession. As expected, market demand was very challenging and our volumes declined 26% in the first quarter in comparison to first quarter 2008.

As a general statement, volumes were fairly stable through the first half of November and then fell sharply across all end-market segments with the exception of Packaging. To respond, most of Spartech's facilities were shut down from one week in November, and two weeks in December and we further flexed production on a plant-by-plant basis in January. In addition to lower overall demand, customers pushed off orders choosing to draw down inventory and delay purchases in anticipation of lower prices based on anticipated lower commodity resin costs.

We continue to focus on maintaining overall market share and believe our sales volume trends with end-market demand, an assessment we validate regularly through our customers and through our suppliers. And as we manage through a period of lower demand, our focus is on our customers and ensuring we remain responsive to meeting their needs and continue to provide innovative solutions, superior quality, and industry-leading customer service.

In our Packaging Technologies business, our Packaging Technologies business remains a bright spot. Although volumes were somewhat lower in the quarter, much of this was due to sales and automotive-related packaging and the transfer of some products to our Sheet segment as part of our Mankato consolidation. We continue to streamline the reporting of this segment and now only 16% is non-packaging. Group packaging applications and particularly sales of our multilayer barrier sheet and packages remained quite strong.

In our custom sheet and rollstock, we continue to execute our fixed and growth strategy, which includes further work on cost footprint and a focus on some exciting early-stage new product developments.

In 2008, we announced the framework and major elements of our strategic and financial turnaround and a detailed roadmap for transforming Spartech. Over the last 15 months now, we have made substantial progress on many key initiatives, including the development of comprehensive portfolio plans, including individual business unit strategies and assessment of core and non-core operating assets; development of broad organizational restructuring plans, including identifying what was required from a talent, skill sets, organizational leadership and overall staffing level; and a broad-based cost-reduction initiative, including sustainable conversion cost reductions and structural cost elimination focused on building a low cost to serve model.

We have completed our previously announced $50 million improvement initiatives and those are now reflected in our Q1 results as either margin improvement or conversion cost reduction. These actions and related annual cost savings consisted of resizing the Company's cost structure and labor force, about $20 million; consolidating three plant operations, $7 million; enhancing margins on unprofitable business, $20 million; and beginning to centralize our procurement function, $3 million. These permanent structural actions helped offset much of the impact of today's demand environment.

Subsequent to the end of Spartech's first quarter, we have completed additional actions to structurally reduce costs, as well as further short-term measures to improve the results of the Company during the current economic environment.

In February and March, we initiated additional operational and organization restructuring, which included eliminating approximately 260 additional jobs across the business and we initiated closure of a portion of our Donchery sheet extrusion operation in France. As stated in our release, these actions will reduce manufacturing costs by approximately $7 million and SG&A expense by $4 million annually.

In addition, we continue to take actions to align our cost structure to the current demand levels. These actions include optimizing the use of flex time across most operations, temporary plant shutdowns, temporary pay cuts across the organization and other expense and capital spending controls. Annual savings from these actions totaled approximately $11 million and Randy will speak to these in a little more detail in a couple of minutes.

We continue to build a highly capable leadership team and make other organizational changes designed to accelerate our improvement initiatives and position the Company for the long term. This month, Rosemary Klein joined Spartech as our new Senior Vice President and General Counsel. She will be responsible for leading our legal function and will be charged with helping to execute many of our important strategic initiatives. She joins us from Solutia where she served as Senior Vice President and General Counsel for the past six years. She brings an extensive experience in corporate governance, finance and transactional activities and we are pleased to have Rosemary join our team.

With that, I will turn it over to Randy who will provide some additional comments on Q1.

Randy Martin

Thanks, Myles. I will be focusing my comments on providing more details on the financial performance in our first quarter ending January 31, 2009 compared to the prior year first quarter. Before I get into the details, I want to remind everyone that we have provided several sources of information relevant to our performance in the quarter. Our earnings release was issued yesterday evening and then we have provided supplemental slides that provide more information on our strategy and additional financial metrics that are often of interest to the shareholders. Those slides can be found on our website in the Investor Relations menu under Presentations. We have also provided a summary of Safe Harbor statements with the factors that could impact our results in the future within the documents that I just referenced.

First, I will provide more details on key income statement components, then I will offer some comments on our balance sheet and cash flows and finally, I will provide a few additional details on the financial improvement initiatives that we have completed.

Starting with the income statement components. Sales, building on Myles comments regarding the sales volume decline of 32% related to our overall end-market demand weakness, three markets had a particular weak demand in our first quarter, largely related to the extended shutdowns in December. These were the transportation market, down approximately 50%, primarily because of the domestic automotive market; the recreation and leisure market, which decreased 55%, mostly because of weak RV sales; and the building construction market, down 28% from the prior year related to our residential construction. These three markets represented 47% of our sales mix in 2008 and that decreased to 40% in the current year.

Also in the quarter, sales were favorably impacted by price mix changes of 6%. Resin prices were up significantly from May to October 2008. Saw sharp declines in November and December of 2008 and then leveling to increasing in January and February of 2009. It has certainly been a very dynamic market for resins over the last 12 months.

Now I will talk to margins. Our gross margin per pound increased from $0.073 in last year's first quarter to $0.105 in the current year quarter. This increase was driven by better mix, increases in sales prices and cost savings from our financial improvement initiatives. Conversion costs were down 21%, or $17 million. The strict variable portion of conversion cost is about one-third of the total. Therefore, you can estimate that conversion costs decreased approximately $9 million related to the 32% lower volume and $8 million related to structural and other cost-reduction activities that Myles summarized earlier.

SG&A costs were relatively flat for the quarter. This reflected the net effect of higher bad debt expense and professional fees, largely related to valuation of services at the end of last year and our cost footprint assessments related to the structural cost reductions, offset by lower compensation for job reductions and a lower run rate on IT spending, primarily related to nearing the completion of our Oracle implementation process later on this year.

Over the course of the last year, we have made substantial investments in activities to improve our organizational structure such as developing the shared financial services organization and streamlined our manufacturing cost. These investments, along with other reduction initiatives, will serve to reduce our SG&A costs as we proceed through the remainder of the year.

A quick comment on the bad debt expense. We incurred approximately $900,000 more expense in this year's first quarter compared to the prior year. While we've historically had good experience in collections, we are actively managing accounts that are paying slower or in refinancing situations and increasing our reserves for circumstances with greater risk in today's environment. Today, our reserve balance stands at $5.8 million, representing 4.2% of our receivable balance compared to $4.6 million and 2.5% at our fiscal year-end just this last October.

Finally, with regard to our Oracle business process improvement efforts, we only have six more core sites left to implement, two of which will be completed at the 1^st of April. We are now utilizing primarily internal resources and reduced our expenditures by $400,000 in this year's first quarter compared to the prior year first quarter.

With regard to our balance sheet and cash flow, at the end of our fiscal year, we reached a record 7.3% of working capital as a percentage of sales. We saw a level of increase during the first quarter, which is typical for the seasonal build that occurs during this quarter, but we need to improve.

Our day’s sales outstanding is at 51 days, which is a day higher than our near-term target. Days payables was two days, unfavorable compared to the same period last year and inventory turns were at least one turn lower than what we would like to see at this time of year. And we have considered efforts to address each one of these metrics.

With a $10 million increase in working capital, we borrowed $6 million from our revolver in the first quarter. While this is not much different than the last years and actually the last several years' first-quarter trends where we borrowed $3 million to $4 million to fund working capital, we believe we can improve this performance.

We were effective in managing our capital expenditures and believe we can continue to control those at a rate below last year's $17 million level. At the end of the quarter, we had total debt of $281 million. Our total debt plus letters of credit and our adjusted EBITDA resulted in a leverage ratio of 3.64 at the end of the quarter, which is below our 4.0 to 1 covenant. And we expect to be in compliance with our covenants over the remainder of the year.

Finally, I will make a few brief comments on the series of cost-reduction initiatives we have completed. Since January of 2008, we have reduced our total headcount by 20%. This has been at the same level for both the manufacturing staff and general and administrative personnel. We have consolidated four operating locations. We implemented 14 operations on our Oracle platform, which is providing us more real-time information and setting up better analysis for business intelligence at all levels of the organization. We began implementing the foundation of our financial shared services organization. This is about one-third of the way complete and it will be completed in whole by the end of the year.

We have flexed staffing and shortened work weeks to produce variable costs more consistent with the current demand levels. We've managed capital expenditures at less than one half the level of fiscal year 2007 and we have implemented numerous meaningful short-term spending controls to drive additional savings in the near term. We do not believe we are done, but we do believe we have demonstrated that we are willing and able to execute change. I will now turn it over to the moderator for the call, Francine, so we can take questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Jason Miner with Deutsche Bank. Please proceed.

Jason Miner – Deutsche Bank

Thank you, good morning.

Randy Martin

Hi Jason.

Jason Miner – Deutsche Bank

Just looking at the purchasing efforts, $3 million is great and I am wondering if there is more opportunity there. I know you have sort of just got started perhaps in what you can do there –.

Myles Odaniell

Yes, I will be happy to address that. We had indicated as part of the what I would characterize as much more comprehensive financial improvement plan that one element of that was going to be a transition from what has historically been a transactional and perhaps tactical purchasing arrangement too much more of a strategic procurement initiative.

We are currently going through that transition as we speak. It is my hope that that will allow us to do a much better job of leveraging our size and our position in the overall marketplace. But to date, none of that activity, none of those results are really reflected in our results, but we are in the midst of that as we speak and I would expect by this time next quarter, we will be able to communicate where we think we are and hopefully we will see some significant benefits from that going forward.

Jason Miner – Deutsche Bank

Okay, great. Just thinking about the plant footprint on what we have talked about over the last year, do you have like a – I know it is a bit blunt – but a revenue per plant kind of number you think about? I mean I guess we are around $25 million. It depends on what you think the new normal level of sales is. But is $30 million or $40 million per plant more at the right level? I mean at what level – how do you think about that?

Myles Odaniell

I will kind of reiterate some things that we have stated before. We have approached optimizing the manufacturing footprint from two perspectives. We have looked at it, one, kind of mid-term based on where we believe we could achieve operational efficiencies by consolidating plants and we are kind of doing those a bit on a one-off basis as we go through that. So that is where we are.

We have then taken a much broader step back and looked at what would be characterized as kind of more of a strategic footprint if we were to start with a clean white piece of paper, what would it look like. And all I would say at this stage is we continue to do that assessment. It is not all that easy to get from where we are to what we might have if we were to start from scratch.

And so that would say we would have larger facilities and obviously fewer, but we haven't really transitioned into that phase of it yet. It is still much more looking on at it on a one-by-one basis. So we haven't, in essence, done what you have said, which is target a plant size and one of the reasons for that is not all the plants are what I would characterize as being fungible in terms of the products we make. Many of them are reasonably unique and different from the others. So what we make at one plant isn't necessarily made at all the others.

Jason Miner – Deutsche Bank

Okay. Fair enough. Just two more quick ones if you indulge me. On the portfolio management, I wonder if you have any other thoughts about properties that might be attractive to others and less core to you versus what we have heard before at this point.

Myles Odaniell

Yes, I think, as we stated before, our intent is to – we are working on a couple of things as we have said. Our intent is to get them done and then we will communicate to the world where we are. So allow us to finish our work and hopefully as we have some positive news to report, we will communicate it at that point.

Randy Martin

I think you would find, Jason, that some of those niche-oriented businesses that don't necessarily add synergies to Spartech could be very attractive to someone else's portfolio. So if you look at the Engineered Products group, you would certainly find businesses that might be much more attractive and much more opportunistic for someone outside of Spartech.

Jason Miner – Deutsche Bank

Okay. That's very helpful. Last one, just material cost per pound, I am backing into like $0.57. I don't know if I am close there, but it is clearly pretty dynamic. Going forward, like if we look at the next two quarters, are you expecting dramatic change? Do you expect it to be sort of flattish? Can you give us any help with resin costs?

Randy Martin

Yes, I think the material costs on a consolidated basis would be closer to $0.75, Jason and it has been, as I mentioned, a very dynamic market, one that had increased 30%, 40% over the course of last year. November and December saw some resins that decreased that much in a 30, 45-day period, but now you are seeing many of them buoyed back with price increases. So looking out over the very short term, I think you're going to continue to see it to be very choppy in the resin pricing market.

Jason Miner – Deutsche Bank

Okay.

Myles Odaniell

I would just add, Jason that this is very much a margin business for us as well and as we have shown over the course of certainly the last three quarters of 2008, as costs go up, we would expect to fully pass those through. As costs go down, obviously much of that has gotten passed back to the marketplace, but I guess the key takeaway here is we are going to continue to manage our margins.

Jason Miner – Deutsche Bank

Okay. Very helpful, thanks.

Operator

Our next question comes from the line of Steve Schwartz of First Analysis. Please proceed.

Steve Schwartz – First Analysis

Hi, good morning, guys. If you guys could help me understand collectively where we are at with the restructuring and the savings. And when I referenced the press release versus last year's actions of $50 million and you guys hitting $50 million in this quarter, are these short-term cost-reduction measures going to be on top of that and the operational and organizational restructuring that you reference in the release, is that part of the $50 million or is that also in addition to the $50 million?

Myles Odaniell

The $50 million is reflected in our Q1 results. Both of those additional activities are additive to that going forward. So clearly the short-term activities and kind of the temporary stuff we are going to refer to, those are additive. And then the additional restructuring activities, which are, for the first time, referenced in our release last night are additive as well.

Steve Schwartz – First Analysis

Okay. So the long-term savings rate then could be expected to hit $61 million, $50 million plus the $11 million and then, in the short term, maybe the next couple of quarters, however long the downturn lasts, there would be an additional $11 million on an annualized basis, like I say over the next couple of quarters? Does that sound right?

Myles Odaniell

Both those are correct statements, yes.

Steve Schwartz – First Analysis

Okay. And then as far as where we are seeing this, if you could help me just reconcile a few numbers here. I guess first off looking at SG&A, this quarter's dollar expense was virtually identical to last year's first quarter. I would have expected that, especially on lower sales with the restructuring that number would have come down. How come we are not seeing that?

Randy Martin

Yes, the two primary things, Steve, are the $900,000 we saw in additional bad debt expense and investments that we have made in some of the structural cost reductions, whether it is through consultants or through some upfront costs to get those things initiated like the shared service organization that ultimately will save us roughly $2.5 million. There is upfront investment for getting the people in place in the centralized location while you are still transitioning from the other. So, currently you would take the $23 million and suggest it's a $92 million run rate. If you look at it without those sort of expenditures, you might very well be more in an $84 million to $85 million annual run rate.

Steve Schwartz – First Analysis

I see. And then stepping up this statement into the gross margin, your gross margin percentage was 220 basis points better year-over-year and if I just calculate that out, it is about $5.5 million of savings. If I then get down into your conversion costs per pound, it actually looks like conversion costs went up by about 17% year-over-year. So I would have expected conversion costs to come down, I would've expected gross margin to maybe show – I don't know – $10 million because, right, we are seeing, on a quarterly basis, about $12 million or $13 million in savings. Can you help me understand that?

Randy Martin

Yes, those bullets are largely a function of the roughly 100 million pounds less in volume that we had in the quarter. So when you look at a per pound metric, those have certainly been impacted by that. When I talked about the conversion costs, we attributed the $17 million decrease. $9 million of that was just purely the volume being down and then an additional $8 would then be on top of that for structural cost reductions. So if our conversion costs were 100% variable, that would work and we would have those completely out of the result as the volume came down. But given that there is step-level changes beyond the strict variable costs, that doesn't come out immediately when you have seen the 30% reduction in volume that we saw in the first quarter.

Steve Schwartz – First Analysis

Okay, that's great. Very helpful, thanks.

Operator

Your next question comes from the line of Eric Swanson of KeyBanc Capital Markets. Please proceed.

Eric Swanson – KeyBanc Capital Markets

Great, thanks. Just a couple of quick questions for you guys here. I have seen recent price increases in your sheet and rollstock and color and specialty compounds I think for polystyrene, polyethylene, and polypropylene. And just was curious to know how these are being received by your customers and what will likely be the implications on 2009?

Myles Odaniell

Well, we've, for the most part – again, this goes back to probably weeks after I got here last year. We have tried to stay virtually current with raw materials in terms of our overall pricing strategy of our finished product. And I think if you look back over our results throughout all of last year, we have largely achieved that objective. We have, in fact, received announcements from our suppliers that they are attempting to increase pricing for February and March and on the backs of those announced increases, we have gone out and announced increases on our finished products.

So, consistent with our success rate last year, I would expect we will be able to achieve that and pass those on to the marketplace. Certainly we are coming off a much lower base from where we were even three or four months ago and everybody understands we don't have big fat margins here. So, it is important from our customers' perspective that they allow us to pass those on.

Eric Swanson – KeyBanc Capital Markets

Okay. And can you just talk a little bit about your ability to take market share away from smaller competitors? I guess more so specifically in your sheet and rollstock and your color and specialty compound segments?

Myles Odaniell

Yes, I think, for the most part, what we are seeing is there hasn't been a lot of market share traded back and forth with the exception that there are folks who are starting to kind of die off and there has been some notable examples in the sheet business last fall and then certainly in the color and specialty compounding business, there are some examples as well.

So I don't know that there has been any intense kind of competitive activity – increase in competitive activity over the course of the last few months, but what I do see is some of the weak sisters are starting to fall off and as you might suspect just given our leadership position in these spaces, we tend to benefit when that happens. But the volume there hasn't been overly significant yet.

Eric Swanson – KeyBanc Capital Markets

Okay. And then just kind of on a broad-based level, can you give us a sense of what portion of the volume decline during the quarter was attributable to the de-stocking versus demand erosion?

Myles Odaniell

I don't think we actually can. I mean we talk about de-stocking and it is clear when we – all the way through the chain – that there is an element of that. But if you were trying to have us define, you know what is the underlying kind of ongoing demand level, I just – it is sufficiently dynamic right now that I wouldn't be comfortable giving you that right now. We are just not sure.

Randy Martin

Yes, Eric. I'm sorry, Myles. Eric, just anecdotally, if you look at December, December's volume was, as a five-week month, was lower than both November and January. So it is clear that things happened in December beyond just ordinary underlying demand trends. Whether it was related to extended shutdowns or de-stocking or their projection for their future, it is certainly hard to always tell that. We get information from customers, but, as a whole, it is hard to really quantify that, but clearly December had some unique scenarios happen to it.

Eric Swanson – KeyBanc Capital Markets

Okay, great. Thank you very much.

Operator

(Operator Instructions). Your next question comes from the line of Eugene Fedotoff of Longbow Research. Please proceed.

Eugene Fedotoff – Longbow Research

Good morning. Thanks for taking my question. Just a follow-up on your last comment, if I understand it correctly, January was a little bit better in terms of demand compared to December. Can you comment on demand in February as well?

Randy Martin

January was improved from December, but again, it is hard to tell if that would be a trend or more just the fact that December was impacted by those other items. So, January was up some from December. February, I expect it to be a little bit down because I think we did recover a bit in January, but we don't have that yet finalized or able to report. But my guess is it will not be up, but that is still yet to be determined.

Eugene Fedotoff – Longbow Research

Okay, great. Thank you. And then I have a couple questions on the Packaging business. Was margin improvement in Packaging, was it mainly driven by mix improvement and also if you can comment what percentage of your Packaging (inaudible) business is non-packaging in related markets?

Myles Odaniell

Sure. We've certainly discussed this at some length in some prior calls, but Packaging is kind of the last legacy business where we continue to have a formula-based pricing across a broad part of our business. We have moved what historically had been long-term contracts to quarterly and then monthly, but we still have pricing lag. So, some of the margin expansion that we saw in the quarter was, in fact, a function of the fact that our pricing was lagging resin declines because of the formulas that we have. And then as you go forward, I think we will see some more normalized levels looking out.

In terms of our overall portion of that segment, again, we basically report out Packaging as a segment, but underneath that, we – essentially it involves a number of plants that are predominantly packaging-related. We continue to kind of clean up that segment and are hopeful, at some point in the future, we will have a clean, discreet Packaging segment that is just packages, but today, about 16% of what we report in the segment is non-packaging. So again, that number, as I have indicated, is down from probably 20% or 25% maybe a year ago and at some point, I think we will have a pretty clean segment to report out.

Eugene Fedotoff – Longbow Research

Thanks. And did you say you moved some business from packaging to Sheet?

Randy Martin

We did. That was related to the Mankato plant consolidation that we completed at the end of last year, so there was a transfer. It impacted the Packaging business by about 7% because the higher denominator was only a 3% positive influence on the Sheet group.

Eugene Fedotoff – Longbow Research

Got it. Thank you.

Operator

Your next question comes from the line of Steve Schwartz of First Analysis. Please proceed.

Steve Schwartz – First Analysis

Hi, just a few small follow-ups. In the release, you commented, in color and specialty, that there was a mix improvement and just wondering if that was internally driven or is that just a factor of the external environment?

Myles Odaniell

That is largely external. Obviously we've got a significant exposure to automotive. Those tend to be products that, on a relative basis, lower margin and perhaps less differentiated in some cases. And obviously that volume is off significantly.

Steve Schwartz – First Analysis

Okay. And then in the conversation around Jason's question with respect to material costs, I think you guys concluded that things were choppy through the quarter from a cost standpoint. They will continue to be choppy. But I am also wondering, is there an impact in there where you are still moving higher cost raw materials through inventory because demand is so low that it is creating a longer lag than we would normally see?

Randy Martin

When you see it drop that quickly in November and December, there certainly is a very short-term. We typically have three weeks, three to four weeks in total inventory, but really in our base raw materials, that cycles through at a much quicker basis. So you may have only two weeks of raw material virgin inventory in the system. So, on a very short-term basis, that can impact you, but it doesn't really impact you over the course of – certainly over the course of a quarter.

We do have the effect of regrind. Regrind is about 30% of our mix of a pound of plastic that goes out in the Sheet group. So that gets factored in there as well. So you are not buying 100% virgin and putting it into the product, so that minimizes some of the impact on that volatility as well.

Steve Schwartz – First Analysis

So at this point for the April quarter, you don't have to give specific numbers, but I mean from a material cost standpoint, do you think you're going to be down in the $0.50 to $0.60 per pound range? Is it going to be greater than $0.60, up toward the $0.70 or $0.75? What is your feel at this point?

Myles Odaniell

Well, again, I commented this is, from our perspective, more a margin business and that would be our focus. If they don't get – if costs go up as announced, we would expect to pass those through and maintain or improve our margins going forward through some of the initiatives we are working on. If they don't sustain what is out there, we will still expect to maintain or increase margins and certainly if they go down, we would expect the same scenario.

Steve Schwartz – First Analysis

And Myles, then along that line of thought where you had this gross margin boost and you mentioned pricing and lagged cost declines, but you go back to more normalized levels. For the next couple quarters then, you don't expect that you would have that kind of year-over-year improvement going forward?

Myles Odaniell

My comment was specific to the Packaging segment where we have got in place formula contracts. So, I guess to that extent, I think we had a little bit of margin expansion in Q4 in the Packaging segment that would probably get normalized out going forward.

Steve Schwartz – First Analysis

I got you. Okay. Thanks for taking the follow-ons.

Myles Odaniell

Sure.

Operator

And we have no more questions in the queue.

Myles Odaniell

Okay, great. Let me finish with a couple closing comments if I may. We are taking what I believe are the appropriate actions on the cost and operations side to manage through what is clearly a very significant broad-based economic downturn. We continue our focused effort to resize our Company's cost structure to ensure that Spartech is profitable even with recession level end-market demand. And this is consistent with our strategy of building a highly leverageable, low cost to serve model for the Company.

The financial improvement initiatives at Spartech, which we initiated in 2008, have positioned us to better manage through today's challenging market conditions while we build a solid foundation for long-term success. We continue to take actions to stay ahead and are initiating additional actions to reduce our cost structure both in response to current market conditions, but also to capitalize on unique improvement opportunities existing at Spartech. As we speak, we are intensifying these efforts and we certainly look forward to keeping everyone updated on our progress. So thank you for joining us today.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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