Myers Industries' (MYE) CEO John Orr on Scepter Acquisition Conference Call (Transcript)

Jul. 9.14 | About: Myers Industries, (MYE)

Myers Industries (NYSE:MYE)

Scepter Acquisition Conference Call

July 9, 2014 10:00 AM ET

Executives

Monica Vinay - VP, IR and Treasurer

John Orr - President and CEO

Gregg Branning - SVP, CFO and Corporate Secretary

Analyst

Brian Sponheimer - Gabelli & Company

Gary Farber - CL King & Associates

Christopher Butler - Sidoti & Company

Gabe Hadje - Wells Fargo Securities

Operator

Greetings and welcome to the Myers Industries’ Scepter Acquisition Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Monica Vinay, Vice President, Investor Relations and Treasurer for Myers Industries. Thank you. You may begin.

Monica Vinay

Thank you, Melissa. Good morning and welcome to Myers Industries’ conference call to discuss the repositioning of Myers into a more focused, more profitable, and faster growing Company. We will be discussing our acquisition of Scepter along with the few other recent announcements, including the intended sale of the Lawn & Garden segment, the completed sale of WEK Industries Inc., and our revised segment reporting.

Joining me today are John Orr, President and Chief Executive Officer; and Gregg Branning, Senior Vice President, CFO, and Corporate Secretary.

On July 3, 2014, we issued a news release announcing that we had completed the acquisition of Scepter Corporation and Scepter Manufacturing, LLC. If you have not yet seen a copy of the release, you can access it on our Web site at www.myersindustries.com, under the investor relations tab. This call is also being Web cast on our Web site and will be archived there along with the transcript of the call shortly after the event.

Before I turn the call over to John for remarks, I would like to remind you that we may make some forward-looking statements during the course of this call. These comments are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and involve risks, uncertainties, and other factors, which may cause results to differ materially from those expressed or implied in these statements. Further information concerning these risks, uncertainties, and other factors is set forth in the Company’s periodic SEC filings and may be found in the Company’s 10-K filing.

I am now pleased to turn the call over to John Orr, President and Chief Executive Officer. John?

John Orr

Thank you Monica, and good morning. It’s a pleasure to have you join us. This morning, Gregg and I will discuss several announcements that we’ve recently made. These announcements reflect the actions that we’re taking to streamline our business portfolio and profitably grow our Material Handling segment. As a result, Myers should be a more focused, faster growing, and most importantly a more profitable Company. We’d then like to open it up for questions.

Let’s begin on Slide five of the presentation. On July 3, 2014, we announced that we have completed the acquisitions of Scepter Corporation and Scepter Manufacturing, LLC. Scepter is our third bolt-on acquisition in the Material Handing segment in the last two years. We purchased Scepter because we believed that it is an excellent strategic fit for Myers as we rationalize our portfolio to focus on our most profitable businesses; material handling and distribution. Scepter’s annual sales were approximately 100 million in 2013, which represents an almost 30% increase for our Material Handling segment’s 2013 net sales.

Please turn to Slide six of the presentation. The acquisition of Scepter not only advances our goal to grow our Material Handling segment, but with margins similar to Material Handling, we believe we can further enhance our free cash flow generation, overall profitability, and return on invested capital. Scepter adds complementary products and technologies for our business and is segmented into four unique markets; Marine, Military, Industrial, and Consumer.

From a customer and product perspective, it aligns very closely with our core growth platforms to strengthen our competitive advantages in storage and safety products and expand our capabilities to grow our specialty molding business in both our Marine and RV markets. It also provides us with the opportunity to move into adjacent markets through Scepter’s military and consumer product lines. It is in line with our long-term goals and further strengthens our competitive market leadership positions.

Scepter’s geographic reach expands beyond its North American markets into South America, Europe, the Caribbean, Australia, and New Zealand, and we see opportunities to expand customer relationships with profitable growth opportunities in highly selected markets. The company employs a total of 350 people in its Toronto, Ontario, and Miami, Oklahoma facilities. We intend to retain the talented and experienced group of employees and work together to make -- to take our combined businesses to the next level.

In summary, Scepter complements our core material handling business in end markets, products, technologies, and geographic footprint. As we integrate Scepter into our innovation and operations excellence programs, we believe it will help to further grow Myers and increase our profitability. On a long-term basis, we continue to focus on a strong capital structure and a balanced capital allocation, which this year includes the previously announced $40 million share repurchase and increased quarterly dividend. In addition, we intend to enhance profitability by delivering higher margins and continuously improving returns on our investments.

I’d now like to turn the call over to Gregg Branning our CFO to review the financials regarding the acquisitions of Scepter and discuss our other recent announcements. Gregg?

Gregg Branning

Thank you, John and good morning everyone. Please turn to Slide seven of the presentation. Scepter’s purchase price of $157 million and trailing 12-month adjusted EBITDA of $23.5 million implies an attractive EBITDA multiple of 6.7 before synergies.

The acquisition of Scepter is expected to be immediately accretive to adjusted earnings per share and cash flow, and the Company anticipates realizing annual synergies of more than $2 million driven by material cost savings and plant efficiencies. To fund this acquisition, Myers amended its senior secured revolving credit facility from $200 million to $300 million. The other terms of the facility remain unchanged, and it is in place through December 2018. The debt we incurred with the Scepter acquisition will be paid down by the proceeds from the future sale of the Lawn & Garden segment together with Myers’ ability to generate strong free cash flow from the businesses including free cash flow that will be contributed by Scepter.

Now please turn to slide eight of the presentation. On June 2, 2014, when we first announced signing the now completed Scepter acquisition, we also announced the commencement of the sale process of the Lawn & Garden segment. As you are aware, we implemented a two-phase restructuring of the Lawn & Garden segment in early 2013. At completion of the restructuring, the Company and the Board of Directors determined that in order to streamline our business portfolio and allow the Company to focus on expanding our higher return, cash flow generating, and fast growing Material Handling segment, the best strategy is to sell the Lawn & Garden segment. We have engaged William Blair to assist with the sales process, which is underway. As mentioned, when we announced the commencement of the sale of this segment on June 2, we expect the sale to be completed in less than 12 months.

Beginning with the second quarter Form 10-Q filing, the Lawn & Garden segment will be recorded as a discontinued operation. Additionally, on June 24, 2014, we announced the sale of WEK Industries Inc. to Industrial Opportunities Partners, owners of Toledo Molding and Die, Incorporated, for approximately $19.5 million. The majority of WEK sales are driven by custom blow molded plastic parts for the automotive industry, which Myers did not consider to be a core business in our strategic plan. The proceeds from the sale of WEK were used to pay down debt.

At the same time we announced the WEK divestiture, we also announced the segment reporting realignment. This realignment reduces our reporting segments from four to two. Starting with the second quarter Form 10-Q filing and going forward, Myers will report its underlying earnings in two reportable segments; Material Handling and Distribution. As always, we are highly disciplined in executing our strategic plan and are firmly committed to enhancing shareholder value and our balanced approach to allocating capital.

This concludes our presentation, and operator we are ready to take questions. Go ahead please.

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Our first question comes from the line of Brian Sponheimer with Gabelli & Company. Please proceed with your question.

Brian Sponheimer - Gabelli & Company

Good morning John, good morning Gregg. How are you?

John Orr

Good morning Brian.

Gregg Branning

Good morning Brian.

Brian Sponheimer - Gabelli & Company

A few questions here. When the purchase price at just under seven times, probably a little bit better than I had expected when you had said that the margins were similar to Material Handling. Is there anything in there that changes the margin profile going-forward where you go from the [23%] margin in 2013 to more Material Handling margin closer to 19%?

Gregg Branning

Brian, this is Gregg. No, that margin should stay consistent as we move forward, it’s a very good business, a very profitable business, and we expect that to continue going forward.

Brian Sponheimer - Gabelli & Company

And will you be releasing Scepter’s financials for the last five years, and so the reason why I asked, I am seeing if there is any bump in sales based off of hurricane activity?

Gregg Branning

We won’t be releasing five years’ worth, but there is the SEC requirement that we put out an 8-K with audited financials for the last two years plus the first six months of this year, and we’ll be doing that within about the next 75 days.

Brian Sponheimer - Gabelli & Company

So that would show 2012 obviously?

Gregg Branning

Right, ‘12 and ’13, and then six months of 2014.

Brian Sponheimer - Gabelli & Company

How did you weigh the decision to purchase Scepter versus say using that $160 million that you paid to buy back your own stocks?

Gregg Branning

Well, we did an internal analysis of that, Brian, as well as we used some outside banking help. We came to the conclusion that from an earnings per share standpoint, if you look out over the next few years based upon what our plans are for the business, but the purchase of Scepter from the shareholder’s standpoint is a better deal than to buy back shares. We’re currently -- I believe we have currently announced that we are buying back $40 million worth of shares this year. The Board did not feel -- did not feel that it was also additional for additional dollars to be spent buying back shares in lieu of making this acquisition based upon the numbers.

Brian Sponheimer - Gabelli & Company

What’s the status of that buyback right now as far as the amount currently completed?

Gregg Branning

Yes, Brian, this is Gregg. We’ll be disclosing that in a couple of weeks when we have our earnings call.

Brian Sponheimer - Gabelli & Company

All right, if I were to think about the value that you expect for Lawn & Garden, how does that compare to what you paid for Scepter?

Gregg Branning

So, again, this is Gregg. We certainly don’t want to put a floor on the value for Lawn & Garden, so we’re reluctant to come up with any number at this point given that obviously it is an option and buyers could receive a copy of this transcript --

John Orr

Or be listening…

Gregg Branning

Yes, or be listening, but we certainly expect to sell it at a good price is the best thing I can say right now.

John Orr

There has been a lot of interest, Brian, and there has been a lot of inbound interest to William Blair. And the feeling is, is that we obviously expect to get a fairly good number for this business. We just obviously don’t want to go into that right now.

Gregg Branning

And that is inbounded.

Brian Sponheimer - Gabelli & Company

And related to the auction process that you can make publicly available?

Gregg Branning

Eight.

Brian Sponheimer - Gabelli & Company

Eight bids, for getting bids for second and third round?

John Orr

Yes, we’re not prepared to say that at this point. What I will say is that we do expect to get the teaser and the SIM out shortly.

Gregg Branning

The other thing I would add to John’s comment earlier is that on the inbound interest, that inbound interest has been -- as he said has been very strong, it’s been both by strategic and financial buyers.

Brian Sponheimer - Gabelli & Company

Okay. And I guess last one, or one or two more here. If you’re looking at your portfolio, obviously you’ve done a lot of rationalization so far. Is there a lot of trimming left to do before you get to where Material Handling and Distribution are where you want them to be?

John Orr

No, I don’t believe so. Brian, this is John. I think doing what we’ve recently announced, with the acquisition of two other bolt-on businesses, Jamco and Novel, for Scepter, I think we’re growing Material Handing the way we expected to with what our long-term strategy is, is a Board approved strategy. The Distribution business and being able to align that rubber company in that with Distribution in that 6% of what they make is all through distribution that puts the alignment there together, so really what was left was Lawn & Garden, which we have a plan for and WEK, which was recently sold. So, I think you can say we’re pretty straight forward now and how we’re into the growth opportunities.

Brian Sponheimer - Gabelli & Company

All right. And finally you get to the end of this deal and you’ll be leveraging roughly speaking around 2x 2015 before you get rid of -- or before you sell Lawn & Garden. What’s the leverage ratio that you’re comfortable with on a go forward basis?

John Orr

We’ve been comfortable with about a two to two in a quarter, two and a half, somewhere in that range, probably no more than two and a half.

Brian Sponheimer - Gabelli & Company

So, if that’s the case and you’re able to get a good price on Lawn & Garden, would you expect that you’d use the additional proceeds to return that cash to shareholders?

John Orr

There is a big possibility because our plan has always been to share the wealth with shareholders and I think we’ve done that with our share buybacks and dividends over the years, and so there’s always the opportunity to take a look at that. We will continue to looking at bolt-on acquisitions for either Distribution and/or Material Handling but if there isn’t the light business that makes financial sense and we have cash and certainly we would return that to shareholders.

Brian Sponheimer - Gabelli & Company

Okay, just real quick two ones. The Scepter privately owned or founder and family owned?

John Orr

You see, founder and family owned it’s a second generation is running at with the third generation right behind.

Brian Sponheimer - Gabelli & Company

And they’re going to stay on to run the business?

John Orr

That’s correct.

Brian Sponheimer - Gabelli & Company

All right, and finally, any sense as to why they told?

John Orr

Yes, I think there were some personal reasons around family wealth, I don’t really know for sure.

Gregg Branning

Yes, we expect -- this is Gregg -- anything on that.

Brian Sponheimer - Gabelli & Company

Okay, thanks guys.

John Orr

Thank you, Brian.

Operator

Thank you. And our next question comes from the line of Gary Farber with CL King. Please proceed with your question.

Gary Farber - CL King & Associates

Yes, sure. Good morning. Just couple of questions on the -- just on the numbers can you give a sense of what the assumption should be for interest expense before you sell, first you get the proceeds and to de-lever and then just is it possible to sort of ballpark what your D&A might look like when some of this stuff is done?

Gregg Branning

Yes, Gary, this is Gregg. Our interest expense, I think, is going to be for the very-very near future somewhere in around six to six and a half. But obviously as you know we’re a strong cash flow Company, Scepter makes us even stronger so we expect to this year debt coming down quickly and then certainly with the Lawn & Garden sale, we expect that can get us back near where we were prior to the acquisition. As to the D&A, what I can tell you is the D&A for the existing business that we acquired of Scepter, which is in our slide presentation, it’s just over $5 million and that’s prior to the step-up that we’ll have under purchase accounting. And certainly we’re in the early stages of doing our valuations come up with that number. So, I don’t have a number to give you on the step-up yet.

Gary Farber - CL King & Associates

And what will be left from the legacy businesses, is like how much for the entity?

John Orr

Yeah. The D&A that will go away from the two businesses, Lawn & Garden and WEK, is somewhere -- is roughly around $13 million. And maybe to give you the additional question that you’re likely to ask is, the CapEx that we have from those two businesses that will go away is roughly $9 million a year. And the Scepter CapEx is between $4 million and $5 million a year.

Gary Farber - CL King & Associates

Okay, that’s helpful. Go ahead.

Gregg Branning

I was just going to say, we’ll see about half the CapEx with Scepter versus what's going away.

Gary Farber - CL King & Associates

Great. And then just lastly, do you expect much fluctuation on the tax rate or it should be sort of steady where it’s been?

Gregg Branning

For right now I would say steady for where it’s been in theory, once we own it we’ll know and we’ve had it for a quarter so we’ll know more. But obviously the Canadian tax rate is about 12 points lower than the U.S., so that should help our effective rate and in theory should bring it down probably at least a point. And so we get more time under our belt I would just say stick with steady as we go.

Gary Farber - CL King & Associates

Okay. All right, thank you.

Gregg Branning

Sure. Thanks Gary.

Operator

Thank you. Our next question comes from the line of Christopher Butler with Sidoti & Company. Please proceed with your question.

Christopher Butler - Sidoti & Company

Hi. Good morning, everyone.

John Orr

Hi Chris.

Christopher Butler - Sidoti & Company

Understanding that the auction process is still to occur, could you give us any help as far as thinking about after-tax proceeds from Lawn & Garden, what’s the cost basis for instance?

John Orr

Yes again, well we’d love to be able to tell that the concern given that we’re still in an auction process starting at that would potentially put a floor on the deal. And so we don’t want to disclose that at this point. The due diligence for a buyer we’ll be able to discover what that basis is.

Christopher Butler - Sidoti & Company

And looking at the acquisition, what's the timing on being able to realize the $2 million of synergies and where are those coming from?

John Orr

Well, we think by the middle of 2015, it’s coming from material savings and ops excellence efficiency savings.

Christopher Butler - Sidoti & Company

And as we look at the WEK and the Scepter deals, side-by-side, could you to talk to what's in WEK was unappealing to your core strategy versus Scepter and these are both basically plastic component products, which would be part of, in a big picture, part of your core strategy?

John Orr

Well, WEK was the only Tier 1 supplier business that we had. It was one customer. We were never going to have more than half of their business. We were never going to have much more than a single-digit margin on the business. It just didn’t run itself to be significantly accretive over the years to come. Scepter on the other hand is a business that we see growth not only in the water and gas container business but also in the military side of it, as well as some of the additional marine products that are sold to the business. They are a significant blow molder.

When we sold WEK that was our only blow molding business so it gives us some additional capabilities around blow molding technology. There is certainly an overlap in our Material Handling business. There is also an overlap in our Distribution business with some of the products that are made by Scepter. And then of course just the profitability, which we feel very comfortable, is the same. And that was pretty much the decision, but the reason we made the decision to move forward on those.

Gregg Branning

And I would also add. Chris, this is Gregg. John’s comment about the Tier 1 is the Tier 1 automotive that WEK sold into which is not part of our core strategy and core growth business.

Christopher Butler - Sidoti & Company

And just finally as I look at Scepter, could you speak to the relative sophistication of the product, gas canisters don’t jump out as highly innovative. Could you talk to what they specifically do that makes this appealing industry from that perspective?

John Orr

Well, certainly the technology that goes into the blow molding of these containers is very complicated actually because its triple layered capability, which means three different types of plastic layers in the container to withstand the fuel that it carries. There is also a lot of technology, especially recently around the spouts. One of the interesting things we found is that since 2009, Scepter has produced over 22.5 million containers and has only had one legal claim, and that was in 2011. So there is a tremendous amount of technology that goes into creating these containers that can carry a volatile liquid obviously. In addition there is a lot of technology also that Scepter bring to the party around ammunition carriers for the military. These are pretty sophisticated products for carrying ammunition in the field, whether it’d be large bore ammunition or mortar rounds and those types of things. So if you could see the manufacturing facility, you would see that there is a tremendous amount of technology that goes into this business. And we think we’re getting a fair reflection of that in pricing.

Christopher Butler - Sidoti & Company

I appreciate the other color.

John Orr

Thanks.

Operator

Thank you. Our next question comes from the line of Gabe Hadje with Wells Fargo. Please proceed with your question.

Gabe Hadje - Wells Fargo Securities

Can you give us a rough breakdown of the different product lines within Scepter, the Consumer segment, Marine, et cetera.

John Orr

Yes, the container business that’s fuel and water is about 65% to 70%. The Marine segment and Military segment makes up pretty much the rest of the business.

Gabe Hadje - Wells Fargo Securities

Okay, is there a material difference in profitability of any of those product lines?

Gregg Branning

No, not really Gabe. This is Gregg.

John Orr

No. I think, probably if anything I know the military segment is probably more profitable.

Gregg Branning

It is, but not much, that’s where it makes the difference.

Gabe Hadje - Wells Fargo Securities

Any unionized employees or contracts or any that you’re thinking about?

John Orr

Not in Oklahoma, but in the Toronto plant it is unionized. It’s a very-very good union there has been no issues with that union in the last 20 years.

Greg Branning

And Gabe, this is Gregg, just to clarify on the union in Canada that you really want to think of that difference in unions in the U.S. And that’s why they’ve had so much -- that much good success with them.

Gabe Hadje - Wells Fargo Securities

Okay. Cross-selling opportunities, I mean, I can see the natural fit with the Marine gas tanks that you guys are already making anything with Novel in these food and beverage handlers, or anything else that we should be thinking about?

John Orr

In Brazil, we do a lot of bottle and crates. Scepter in Canada has done bottle crates for companies like Coca-Cola and so on. So we see some potential opportunities there. What we really see out of Scepter though is a lot of the fuel and water containers now are sold into Latin-America, Central-America and Australia, New Zealand. So these are opportunities for us from cross-sales standpoint with some of our other products. In addition, we think there is some cross-selling through our distribution business. We were both at the SEMA show last year we noticed that Scepter had a booth there and selling some automotive products. So, we see some opportunities there as well.

Gabe Hadje - Wells Fargo Securities

Okay, one last one probably maybe Greg. Is there a net number that we can be thinking about, ex-LNG, ex-WEK plus Scepter, and then maybe just in EBITDA level and I look at LNG profit from last year, I think it’s like 23.5 million; so Scepter and LNG kind of cross retailer out plus a couple of million dollars of synergies. I mean are we thinking about it in right way, and maybe from that zero for earning or after that?

Gregg Branning

Yes, I think, right after that, that’s a pretty safe number at this point. We’ll probably be disclosing more and make some more -- give some more guidance and information when we have our second quarter earnings release, and certainly when we have the issued the 8-K, but that will be in roughly 70 days or so. That will give pro forma numbers with Scepter and gas as well.

Operator

Thank you. (Operator Instructions) Our next question is a follow-up from the line of Brian Sponheimer with Gabelli & Company. Please proceed with your question.

Brian Sponheimer - Gabelli & Company

Hey guys, just one last one was, was Scepter an auction?

John Orr

No it was not an auction.

Brian Sponheimer - Gabelli & Company

Okay.

John Orr

No, we found them and then they kind of found us. So, it was not an auction.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Ms. Vinay for any closing comments.

Monica Vinay

Thank you, Melissa. We thank all of you for your interest in Myers Industries and your time and participation today. As a reminder, a transcript of this call will be available on our Web site within approximately 24 hours. A replay will also immediately be available via webcast or call. Details can be found on the Myers Industries’ Web site under the Investor Relations tab. Thank you for joining us. Have a great day.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!