Spartech Corporation F1Q08 (Qtr End 2/29/08) Earnings Call Transcript

Mar.24.08 | About: Spartech Corporation (SEH)

Spartech Corporation (NYSE:SEH)

Q108 Earnings Call

March 11, 2008 8:30 am ET

Executives

Myles Odaniell – President and Chief Executive Officer

Randy Martin – Executive Vice president and Chief Financial Officer.

Analysts

Mike Harrison –First Analysis

Mike Sison – Keybanc Capital Markets - Keybanc Capital Markets

Jeff Barnet – RBC Investments

David Begleiter - Deutsche Bank

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2008 Spartech earnings conference call. (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, Chief Executive Officer. Please proceed, sir.

Myles Odaniell

Thank you, good morning and thank you all for joining us this morning on Spartech’s Q1 2008 earnings conference call. I would like to spend the first part of the call talking about the company and some of my broad assessments based on my first ten weeks in the role. I will briefly discuss our external environment and issues impacting our performance, cover some of our progress we are making on key initiatives and then discuss where we are going, including the framework of a turnaround.

I will then ask Randy to provide an overview of our Q1 performance covering the information we provided in detail in our press release and back-up slides last night.

Let me first revisit why I came to Spartech. As part of the recruiting process, I reached out and received input from a variety of sources, including customers, investors, the board and management, and I was impressed by the reputation of this company, our strong position with our customers and in our markets, our solid management team and what I viewed to be a tremendous potential for improvement. I also spent time looking for a company that will provide the right fit for me and I was intrigued by the opportunity to lead a substantial turn around in the short term that a cultural and organizational transformation focused on repositioning the company for sustainable long-term growth. After being here a couple of months, I am very comfortable that the company and the opportunity are all that I expected them to be.

I do have some additional insights from the last two months since I can now see what is happening inside Spartech. Short-term performance is disappointing, and obviously a bit worse than I expected, albeit primarily due to our cost volatility and challenges managing higher feed stock and energy costs. But on the positive side, and very importantly, opportunities available to us to improve this company are significantly greater in both number and scope that I would have expected from the outside looking in. But, we clearly had some challenging short term issues; I do not see major structural impediments standing in the way of our ability to build the great company for our employees, customers and shareholders.

We are well positioned in our markets and with our customers, we do offer value added innovative products and our cost structures competitive today and I believe can be significantly improved. I would not have joined this company purely to lead a short-term financial turn around. So after we manage through these issues and rebuild some of the foundation, our focus will be on growing and building a healthy, vibrant company. Spartech should be more profitable throughout the entire economic cycle including times with weak end market demand and high feed stock and energy costs. We will accomplish this through meaningful reductions in our overall cost structure, improving our internal business processes, such as pricing and margin management, and refocusing our efforts in growing the company. This is a very challenging external demand environment. On a year-over-year comparison basis, we are typically seeing 3% to 5% lower demand in many of our product lines driven by weakness in several of our key markets, such as automotive and heavy truck sectors and housing and construction-related applications.

We believe our sales volume is largely trending with end market demand and we continue to maintain overall market share. High crude oil prices now over $108 per barrel have resulted in a spike in our polymer and energy costs which has squeezed margins and profitability in the short term for both Spartech and we believe the broader industry. The situation has been further compounded by the lag still built into our and our competitor's pricing mechanisms and our inability or perhaps our unwillingness to pass through raw material-related energy cost increases in a timely manner has been a primary cause of our poor Q1 results. Direction to my team is to manage under the assumption that we are in a U.S. manufacturing recession and we do not see economic recovery in the near-term horizon. This means that we will continue to have rather poor visibility on the demand side, slower growth and an environment of volatile and rapidly rising input costs. Accordingly, we are focusing on what we can control and this is the basis for our performance improvement initiatives.

I would like to briefly comment on some of the progress we are making so it does not get lost in our Q1 results. We have already made a couple structural changes in our organization since I arrived. First, we realigned the packaging business which was part of the custom sheet and rollstock unit. Packaging now reports directly to me as a separate business segment. This provides us with several benefits. First, our management running the sheet business can now dedicate all of their energy on a financial turnaround with a focus on operational excellence, cost reductions, and restoring margins in the sheet business. The change in reporting the packaging business will then allow me to be more directly involved in the growth of our Spartech Packaging Technology segment where we will continue a strong focus on innovation-driven organic growth and building a meaningful packaging platform.

These are two distinct businesses with different drivers, opportunities, and strategies and I believe they should be managed accordingly. Second, we have appointed a Vice President of manufacturing for the sheet business, and now all of our 20-plus plants report into role. As many of you know, the company was built with an acquisition roll-up strategy. We have continued to manage many of these operations in a legacy structure as either stand-alone plants or stand-alone businesses and we have not yet captured the value or synergies of managing our business as one company with common systems, common practice and shared services. The focus of this new role is to establish functional excellence in manufacturing, substantially reduce our overall manufacturing costs, optimize across the entire manufacturing asset base while we manage our plants as cost centers and establish common metrics for cost, quality and customer requirements. This transition will take some time, but I expect significant value going forward.

Our intent is to build a low-cost manufacturing structure and capabilities that are much more scalable than what we have today. We've made very meaningful progress on the Greenville expansion. The February results are finally hitting the productivity targets set at the beginning of the project, and we recognize the gross profit in February for the first time since the transition began in August of last year. Our new manufacturing VP in the sheet business is documenting and training other key managers in the business to learn the lessons from the Greenville consolidation as we move forward with other similar initiatives in the future. We continue to make progress with the business process improvement project and implementation of the Oracle system with now 20 out of 45 sites completed. And we continue on a schedule to complete this important effort for all of our core operations by the end of 2008.

Spartech has historically not been a data-rich company in culture, and I am very confident that our business process will benefit with Oracle as an enabler for major improvements in our financial results once we get more quality real-time data and metrics such as customer, product, and market profitability in the hands of the key decision-makers. Consistent with the discussion on the manufacturing organization, this will also allow us to build elements of a shared service function that will provide lower cost and improved capability. We've also completed integration activities on the Creative Packaging acquisition which we acquired in September. The business of performing according to our plans and I am quite pleased with the transaction and potential for future growth in this segment. The difficult economic conditions do not seem to be dampening interest in our product innovation among our packaging customers, and we have a very active new product development effort in this business. With those thoughts, I will ask Randy to discuss Q1 performance metrics and issues and then I’ll come back and provide some comments on our future.

Randy Martin

I will be providing a discussion on the first quarter performance using the back-up slides provided on our website for the call today. You can find these slides at www.spartech.com located in the Investor Relations menu under presentations. Starting slide four, we summarized our sales mix by end markets we serve. Packaging continues be our largest market and this market was stable in the quarter. The markets most impacted by the challenging external environment that Myles mentioned earlier include transportation, building construction, and recreation and leisure. These markets represented 44% of our business in the first quarter. Excluding the extra week in 2007's first quarter, transportation is down approximately 15% to 20%.

Building construction is up slightly for us as the TPO roofing business continues to grow around 20% as it captures a greater share. Otherwise, building construction was down for us slightly for the quarter. And rec and leisure was down approximately 15%. As Myles stated, we are using the assumption that these underlying markets will continue to be down for the remainder of the year. Overall, our sales volumes were down 3% for the comparable first quarter of 2007. Slide five shows our sales volume fluctuations by segment of the 2007 acquisition and price mix impacts. The 3% volume decline represented a range of 1% to 4% decreases for each segment. You'll note that in the second line we pull out the impact of reporting an extra week in 2007's is a 14 week first quarter.

I wanted to explain that the newly formed Spartech Packaging Technology segment represents the business acquired from Creative and five Spartech facilities. While each of the Spartech facilities primarily serve the packaging market, they also continue to serve non-packaging applications. As a result, 20% of the sales in this segment still go into the non-packaging applications such as automotive and agriculture. During the quarter, the packaging business volume was slightly up, but the non-packaging applications resulted in the negative 1% underlying volumetric overall for the segment in the quarter that you see on the slide.

Looking at price mix, this reflects the portion of price increases passed through to customers during the quarter plus or minus other effects of mix. The sheet segment generally had negative mix from lower sales from RV, spa and heavy truck applications while the coloring compound positive mix from selling more TPO roofing and calendar film products.

The following slide now provides the sales, material margin and conversion cost trends on a per pound basis for the last three years. This slide highlights the negative impact on our material margin during the last half of 2007, which has continued into the first quarter of 2008 where our material margin decreased from the $0.35 level to the low to mid $0.33 per-pound level that we recognized in the first quarter. During the first quarter, two of our primary resins, polyethylene and polypropylene were up between 30% to 40% compared to the prior year and polystyrene was up 10% compared to the first quarter of 2007.

We have highlighted the primary root causes to this continued price pressure in the past, including high crude oil prices which are now over $105 per barrel, the weakening U.S. dollar, and relatively higher international demand, which is pulling domestic supply and keeping U.S. prices up, and the consolidation of resin suppliers that we have seen more recently.

It's clear that many of our historical pricing practices, whether it be contracts, pricing adjustment mechanism, and pricing disciplines are not sufficient to manage the frequency and the level of pricing changes that we have seen more recently. Many of our pricing practices were established when resin prices were more stable and only fluctuated 1% to 3% over shorter periods of time. We are taking specific actions to address the negative impact of these dynamics through changes in those contracts and commercial profits including pricing policies with both customers and suppliers.

From a big picture perspective, part of the market views this as a converter, in which case we should never expected to be the shock absorber for higher feed stock prices. Another part of the market views us as a value add supplier, and we certainly are. In that case, we should price based on the value of our products, service and technology that we provide which should be fully independent of our cost. In either case, we should not be in a position to absorb huge raw material spikes and this is something that we are clearly working on to improve.

The final slide, number seven, provides a high-level summary of the items impacting our first-quarter performance by bridging $19 million decline from 2007 to 2008’s actual operating earnings. The slide shows that approximately 1.2 million of the decline related to the 3% decrease in underlying volume which represented the first slide that indicates the 1 million 196 on the slide.

Another 5.7 million relates to the pressure on our material margins. Impacting this category was a general lag in passing through prices, but we also had a problem with a particular pricing formula on a large application that cost us approximately $1.5 million in the quarter. We have rectified this situation beginning in the February month. The negative $5.2 million related to increasing conversion costs are where our costs were not absorbed by volume or priced into the products. Myles will speak to both of these points later on in the call. One item that specifically impacted this category was the final transition of the Greenville consolidation that we estimate had a $2 million negative impact in our first quarter gross profit before it started to be profitable now in February. The material margin decrease also included 2.7 million from decisions to liquidate certain inventories to accelerate cash, reduce holding cost and support our operational efficiency efforts. This was an effort that we took on between December and January and made various decisions to reduce inventory that was six months or older.

Included in the other net of 2.9 million is the additional spending of SG&A for the quarter related to Oracle, bad debt increases and salaries net of the benefit of the Creative acquisition operating earnings for the quarter. In summary, from my comments during the discussion, I noted approximately six million of items that were specific to our first-quarter performance. Another 7.5 million on the gross profit line is related to material margin and conversion cost impacts that are largely within our control if we make the necessary changes and then execute.

Fundamentally though, our return to more acceptable performance is continued upon the return of our material margin of $0.35 per pound or higher and a reduction in our cost structure to a $0.23 or less conversion cost. Myles will be discussing the performance improvement initiatives to address these specific metrics. I wanted to end with a few comments on balance sheet and cash flow position. We borrowed a similar amount from our seasonally low first-quarter performance as we did in July, in January 2007 with an additional amount for early quarter stock buybacks in November.

We have not repurchased any shares since November, and in the near term we will focus on our efforts of improving the operating performance of the business. Despite the net loss for the quarter, we did continue to generate positive free cash flow and will be reducing our discretionary spending during the remainder of 2008 including a current estimate Cap Ex which was $35 in 2007, we expected to be less than 20 million for fiscal year 2008. We do continue to see solid performance in our working capital of 10.5% of sales compared to 10.7% in the first quarter of 2007, and we continue to keep our focus in this area as well. Also, we recently obtained an amendment in our leverage ratio in our bank credit facility to obtain relief in this ratio to accommodate our weak operating performance in the last two quarters and to provide greater flexibility to take the necessary actions that Myles will now review as he looks at going forward.

Myles Odaniell

Thank you. Based on my earlier thoughts and our current performance let me talk about where I would like to see us going next. While our market demand in our resin pricing environment continues to present challenges for the company’s operating.

We are now moving quickly to make substantive changes in our business to respond to these external issues. As I previously stated, we are managing under the assumption that the overall end market demand and raw material environment will remain challenging for the foreseeable future and we must take steps to manage what we can control. There is meaningful opportunity to -- for improvement based largely on what we can manage and aside from the short-term economic pressures I do not see external structural issues that will stand in our way. We have internal opportunities centered around our business practices such as how we manage our cost, pricing, and margins, continuous improvement initiatives, and activities such as project management, all things that we can control.

My primary objective in the first couple of months was to refocus the organization on the critical leverage to improve future performance and to reinstill a more appropriate degree of urgency throughout the organization. Our primary focus for the next several quarters will be on structural cost reduction and improving our business processes. Accordingly, the management is working with a sense of urgency to overcome the disappointing results from the last three quarters and is now focusing on specific profit improvement initiatives to ensure that we can turn around the recent trends in our performance and better position Spartech for sustainable long-term profitable growth. We are finalizing the elements of a plan which we believe are appropriate in scope to help address the short-term performance of our business and to build on lower cost infrastructure to support long-term sustainable profit growth and generate enhanced shareholder returns. This effort includes several areas of focus closed captioning the following:

First is a broad-based organizational assessment to identify both the size and the structure of the organization we need to be successful, both in the short-term and going forward. Including this assessment is a clear understanding of the skill sets and capabilities to deal with today's challenges and to capitalize on tomorrow's opportunities. This effort, this effort will directionally focus on a more effective, cost effective shared service structure.

Second is further streamlining of our manufacturing cost structure and footprint within specific focus on building a lower cost manufacturing infrastructure. I view this effort in three parts. First is adjusting our cost structure to address the reality of our current short-term demand environment. Next, looking at our long-term manufacturing footprint. And third, building a more centralized manufacturing structure so that we can make decisions on our structure and asset deployment and cost on a best for Spartech basis. This will be a cultural change that we, as an organization, need to make to optimize our performance, but one that I believe is fully worth the effort. The company has done a solid job identifying opportunities to reduce cost and we will continue that effort going forward.

Third area of focus is reassessment of our portfolio looking at underperforming businesses and underperforming plants, and this work is ongoing. Fourth is a focus on accelerating our organic growth initiatives and building much more rigor and urgency into our commercial and new business development processes. That work is also ongoing. And finally, we are focused on an effort directed at improving procurement in commercial business processes including customer product and market segmentation; focus on cost and margin management.

We have historically been a volume-driven organization with a largely polymer cost plus sales mindset, and I believe we will benefit greatly with more rigor in our business segmentation and improved business processes including a focus on our pricing mechanisms, as Randy discussed. Additionally, we have not been very effective managing our margins, which is clear from our current challenges and results in trying to manage feed stock and energy increases. Central to this effort is a continued rollout of the Oracle initiatives. My intent is to provide further details on our overall plans and execution of specific action as is appropriate during the course of the second quarter and certainly throughout the course of 2008. With that, I would be pleased, both Randy and I would be pleased to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Harrison of First Analysis. Please proceed sir.

Mike Harrison –First Analysis

Hi, good morning.

Myles Odaniell

Good morning Mike.

Mike Harrison –First Analysis

I was wondering, is there any way you can quantity tie the EPS impact of having one less week in this quarter versus last year?

Randy Martin

Basically, be 7% of the $0.25 that we had last year. If you just look at it on a 1/14 type approach.

Mike Harrison –First Analysis

Okay. You know. As I look at the contribution from the Creative acquisition, that might have been a little bit lower than at least I was expecting based on sales for last. EBITDA after adjusting for the last business. Can you talk about how those businesses have been performing relatively to your expectations and what others seasonality to that business?

Randy Martin

Go ahead Myles.

Myles Odaniell

I can talk to that, Mike. The business is performing slightly ahead of the budget that we put together and slightly ahead of what was in our prospectus when the transaction was consummated. There is a heavy seasonal element, as I think you know. A lot of Creative packaging business goes into packaging for berry and fruit and things like that and that doesn't really kick Calendar, our fiscal quarter two. So, Q1 is typically a pretty slow quarter relative to the other three.

Mike Harrison – First Analysis

Okay. That makes sense. Myles, as you look at the changes would you like to make or at least consider making in the portfolio, can you talk about what the company starts to look like when that process is complete or close to complete? Maybe what end markets and what lines of business you hope make up a bigger part of the company and what?

Myles Odaniell

I will make some general statements and as we get into this and specifically we talk about some of the specifics around some of the turnaround initiatives. My intent to the extent is it is going to impact our folks to impact things internally and then talk to the rest of our stakeholders here first. But in terms of directionally where we are going with the portfolio, we have a number of businesses that are what I would characterize as have some heavy-duty commodity attributes and what I would like to see us do is transition out of some of those and hopefully transition into businesses that have, A, more growth potential or B, higher profitability and I would put packaging into the category that embodies the last two. So directionally what I would like to see us do is transition away from some of the more commodity-like products and into some higher value segments.

There are parts of our business today in both the sheet and the coloring and compounding business that are not performing well and we are reviewing those as we make decisions on their disposition going forward. We will communicate those, (inaudible) so, there are plants within the portfolio that are not performing where they need to be and we are going to try to fix them. If we can't, we will take actions on those as well going forward. So it is obviously a general answer. I know what we are looking at this stage, but I would prefer to comment on it after we have made some commitments internally and then we will share them with you.

Mike Harrison – First Analysis

And then the last question I have for now. Is historically Spartech has been actually pretty good at passing present costs on to customers with minimal lag. I was wondering if could you separate out maybe the – you call it a hangover effect residual from the Greenville consolidation that maybe we can hope could clear up in a couple quarters or if you think this is mostly a product of the high resin cost coupled with slow domestic demand that maybe could take a little longer to see some improvement in terms of pricing?

Myles Odaniell

Maybe Randy can give you a specific number on Greenville. I can talk to my assessment of the situation as well.

Randy Martin

Yes, I think on Greenville, Mike, we quantify Greenville has having a $2 million impact in the quarter, it’s hard to distinguish what impact is related to some of the disruptions because, as Myles mentioned, we are at a profitable level in February and we are very marginally profitable in January, the August through December time frame had not been profitable. So, we have just now turned that around from some of the internal disruptions we had during the same time when there is a lot of market dynamics going on in polyethylene. It is hard to distinguish that but we are comfortable saying that 2 million is going to be improved going forward as we look at the disruptions that are limited and some of the more favorable pass-through that we have in the productivity that we can now meet lead times and deliveries and hit the performance levels that we had targeted from the beginning of the project.

Mike Harrison – First Analysis

I guess maybe if I could rephrase my question a little bit. Now that Greenville is largely ramped up, should we expect to see that your pricing -- you had talked previously that it was difficult with some delays that you were seeing in product coming out of Greenville. It is hard to get pricing through to those customers and also say well, it is going to be two weeks later than you wanted it. With that clearing up in Q2, do you see maybe a little bit of improvement in the material margin in the pricing there?

Myles Odaniell

I would say this going forward. Greenville should -- based on current performance, Greenville should no longer be a contributor to our inability or willingness to pass through costs and improve our margins here. Independent of that, I think we still have competitive challenges and things like that. But Greenville should no longer be an excuse or reason why we are not successful in our efforts in that area.

Mike Harrison – First Analysis

Okay. Thanks very much. I’ll get back in queue.

Myles Odaniell

Thank you.

Operator

Your next question comes from the line of Mike Sison – Keybanc Capital Markets. Please precede sir.

Mike Sison – Keybanc Capital Markets

Hey guys. Good morning.

Myles Odaniell

Hi Mike.

Mike Sison – Keybanc Capital Markets

You know, its just revisiting the price issue and even if I exclude Greenville, it does appear that there have been challenges in pricing. Even when I look back to '05, when your material costs were up 20% to 30% year-on-year. You are able to keep the material margin pretty flat and your volumes that year were down 1%. So, maybe a little bit of color is it – are you seeing more push-back from customers? Maybe give us an idea how the contract is set up now. Because, again, it doesn't seem like you guys have had that problem before?

Myles Odaniell

Mike, I will give you my perspective and Randy can certainly chime in as well. And first of all, I want to -- I will choose my words carefully but I absolutely don't want this to be viewed as an excuse for poor performance or for the company not executing in a fashion consistent with the way we need to execute going forward. We went into the first quarter with a forecast on raw materials that was actually indicative of something that was reasonably stable, and I think they went out and established prices for the first part of the quarter and in some cases the whole quarter based on that forecast, and then what we saw was a rapid jump in a few of our key feed stocks. In some cases we even negotiating feed stock prices well into the quarter or even retroactive for the quarter by the end of January. So I think what happened is they just got caught with their eye off the ball.

And we are not -- not doing an effective job at all linking our pricing on a real time basis with our clause. And, obviously when you are talking about free small margins in the first place, a couple cent increases in your input cost is very meaningful overall for this company. So the question is, what do, we do about it going forward. We are trying to really tear down what we have in terms of a structure on pricing mechanisms and how we manage lag and how we address competitive pricing. It's going to take a couple of quarters, in my opinion, to get restructured and formalized in a fashion that I think is appropriate, but I would just say the ball was dropped in the quarter and I guess the good news is it is something that we believe we can fix and we are working aggressively to do that.

Mike Sison – Keybanc Capital Markets

Can resin prices stay as is, your material cost per pound was up 12% in the first quarter versus the first quarter of ’07, for the full year with that the material cost per pound increase roughly in that 10%-12% range? assuming it stays at the same levels?

Randy Martin

I think that’s – that of assuming that we have the same speed and level of price increases we incur in the first quarter, I think that math will work. As you know, we have a fair amount of regrind and other additives that goes into our products. So, even though some of the metrics went up as much as 30%. When it gets mixed into our product that’s what effect the 10% or so number that that you are referring to and sliding that will be a fair and consistent expectation that we continuous at that level.

Mike Sison – Keybanc Capital Markets

Then in the first quarter you had a plus 4% in pricing, so the GAAP was that sort of plus 8 I guess. So, you need to make up by year end?

Randy Martin

That's price and mix so I commented that particularly in the sheet group are we are selling more dunnage [ph] material and appliance and electronics and less RV, spa and heavy truck. There is a pretty big mix element there as well, so that is impacting that differential you are referring to. So the 4% is that net effect of that mix effect as well.

Mike Sison – Keybanc Capital Markets

That is to the negative though. So your actual pricing was better?

Randy Martin

Right. And then you have got on the car and compound side where the mix effect of 10% and that's because they had a favorable mix on top of the price and they passed through. So, and they use a higher level of wide spec. So the material price on virgin have a little less effect on their price, but they had a positive mix on top of that.

Mike Sison – Keybanc Capital Markets

Myles, is it too early to say that with the visibility in what you think resin costs are at, the changes you are making in pricing that you can close the gap by the end of the year?

Myles Odaniell

I would -- I would answer the question this way. I -- we generally don't have a level of visibility that has allowed me to have a comfort that I know what the base is, so to speak. So what I am doing is focusing that everybody here on all the add-ons and the things we can manage and control. I think it would be very premature to given the uncertainty in terms of our end markets to be able to take a position like that at this time.

Mike Sison – Keybanc Capital Markets

Randy, come the second quarter to do you pick up an extra week versus the previous year?

Randy Martin

No we don't, we had 23 week 2007 and 52 week 2008. So the extra week resided in the first quarter of '07#, so we will be comparable for each quarter the remainder of the year. Obviously that year-to-date will still have that extra week in '07.

Myles Odaniell

I think that’s an every six year phenomenon?

Randy Martin

Five to six year depending on how the calendar rolls out.

Mike Sison – Keybanc Capital Markets

Okay. Then Randy when I take a look at the first quarter ’08 earnings bridge so the negative to the extra week goes the way the inventory liquidation the minus 2.7 goes the way, right?

Randy Martin

That’s correct.

Mike Sison – Keybanc Capital Markets

The -- the other net -- the Creative SG&A, that continues?

Randy Martin

That will be the net effect of Creative and our SG&A spend. I mentioned the increase in bad debt. You can make a guess whether some of that continues or not and the IT spending, which would continue through our deployment of that. So the vast majority would continue; however, as we were mentioning about ever, Creative is more favorable to the -- to the operative earning going on till the second, third and fourth quarter.

Mike Sison – Keybanc Capital Markets

Right. And the price mix of material margin, the 1.5 million that was fixed. So that bridge would improve second quarter?

Randy Martin

That’s correct

Mike Sison – Keybanc Capital Markets

And then I guess the commentary on volume, Myles, is that recession for the rest of the year, minus 3% to 5% in volume, in demand. So your volumes for the full year will probably be down in that neighborhood?

Myles Odaniell

The only thing I would add just from a sequential quarter comparison basis, is we, we would expect to see seasonal improvement in our business from our Q1. That's the pattern that is typical and it's, if you look back at the results it is generally reasonably significant as well. So I kind of take that out of the overall commentary that impacts kind of the general economy.

Randy Martin

Also, Mike, if you're comparing to the prior year, as you get out into the third quarter, the fourth quarter, you are going to see comparables that will be a little bit more consistent because we saw some of the decline in volume in the fourth quarter as well.

Mike Sison – Keybanc Capital Markets

Heading into the second quarter, my sense is that you should be back to the positive on EPS based on the negatives that go away as well as maybe a better pricing and so on and so forth?

Randy Martin

Without commenting on guidance, Mike. Yes. I think if you start looking at the operating earnings bridge and the items we should improve upon and the items we have in our control, you could look to that direction.

Mike Sison – Keybanc Capital Markets

Last question, Myles. There was a notion in previous regimes, I suppose that you have roughly 37 plants, I think, right now, and that if you started from scratch you could maybe do it with 20 to 25. When you think about your manufacturing footprint, are you thinking longer term to be that aggressive if you will?

Myles Odaniell

Yes.

Mike Sison – Keybanc Capital Markets

Yes, okay. Thank you.

Operator

Your next question comes from the line of David Begleiter of Deutsche Bank. Please proceed, sir.

David Begleiter - Deutsche Bank

Thank you. Good morning.

Myles Odaniell

David, how are you.

David Begleiter - Deutsche Bank

Good, thank you. Myles, can you go through the corporate expense line item, the $8.5 million, why the increase? And, again, for last year why the restatement from, I believe, the $4 million range to the $6 million range?

Randy Martin

All right, there are two answers there, David. First of all, the increase in the prior year is one-half million dollars related to Oracle. As we now get into the later stages of that implementation, most of that is expense as opposed to capitalized where you are in the design stage and capitalize now with training and support is expended through the expense line. That's why you see the increase there.

We had 600,000 additional bad debt expense in the first quarter and then the normal increases for salary. So, that the increase over the prior year. As far as the restatement, our decision was to stop allocating IT and other corporate-level costs to the segments and retain corporate, manage that more closely here and it is more comparable than looking at operating results as cost centers and performance in the business on material margin and conversion costs without having to go through the allocations we previously did. So, we restated all of our prior year quarters that you will see now to reflect those corporate level expenses on the corporate line.

David Begleiter - Deutsche Bank

That’s helpful. And Randy, what was the cost of the covenant waiver in the quarter?

Randy Martin

Don't really disclose that in any detail. It was a minimal cost in the current period in the second quarter.

David Begleiter - Deutsche Bank

Fair enough. And Myles, Spartech has been passing through resin costs for its entire history. Again, I am confused why this quarter was different. Was there a lack of focus during the CEO transition because these people who pass it through, they are not new to the phenomenon of rising resin prices.

Randy Martin

Yeah, maybe I’ll take that, first part and then Myles can add on. I think David historically we had a pretty consistent relationship between volume going up and resin prices going up at the same time, and its volume came down, resin price strictly dropped. So, I think that’s relatively new phenomenon for us in dealing with that. And I think what it did is it exposed some of our pricing practices and our contracts weren't effectively managing during high increases in a short period of time. And so, I think it exposed quite a few of our practices which used to be kind of offset by, well, if volume came down you had an offset because pricing was following that and vice versa. As volume went up, pricing would go up and they go up and they would generally offset each other from going that direction. So, I think we’ve exposed some things and as we look into those issues of our pricing mechanism or discipline plan with customers and suppliers, those are things that need to be addressed specifically in these type of times. I think they got kind of muted in the past, and they are pretty exposed right now as we see this sort of environment.

Myles Odaniell

David, I will just say this. We commented on all of these, but I will just put them in a single sentence here, the types of stuff that Randy just talked about, not the mechanics of raising and passing through cost increases and we will fix that. We clearly had a very rapid spike that we just fell behind in the quarter. I can't say that won't happen again, but we are going to work to make sure that we are better suited to deal with it when it does come. We had some element of trying to go out and raise prices when we couldn't supply out the Greenville plant. That was certainly part of this. Your comment was management distracted. Obviously a lot was going on in the latter part of the year in November, December. I can't say for sure, but I think if you go down that list of things, we are addressing each and every one of them with an expectation that we are going to do a much better job as I think we have historically passing through raw materials and maintaining our margins. So I think if you look at the contributors that resulted in some truly poor performance in the quarter, I think most of them are things them are things that we can manage away going forward.

David Begleiter – Deutsche Bank Securities

Analyst that is very helpful. Lastly, Myles, from the economic standpoint, are you seeing any deceleration in the economy or just a continuation of slow growth or no growth?

Myles Odaniell

Well, we've got parts of our business where volumes are have declined and in some cases they have declined significantly. If you look at the sheet business, clearly things such as our RV and our pool and spa business, those are way off in terms of demand, so we have got volume reductions. If you look at our coloring compounding business, we have heavy exposure in automotive and obviously you can just track build rates and things like that better than us. Those volumes are down as well. And if you look at generally what's happening to suppliers in automotive, the industry has a number of folks who are in bankruptcy or teetering on that edge right now, and it is a pretty dicey place right now to be doing business. Having said that, we do have other parts of our portfolio that is pretty healthy right now. In the color and compound area we are seeing a lot of growth in construction, kind of independent of the housing market being weak. That is industrial construction. And then we are seeing a pretty stable climate in our core Packaging Technologies business, as well as what we sell out of our Sheet business and our Color and Compounding business going in to the packaging sector. Those are pretty stable. On balance, we are down and we're down because of some of those key markets being off.

David Begleiter – Deutsche Bank Securities

Thank you very much.

Myles Odaniell

Certainly.

Operator

Your next question comes from the line Jeff Barnet [ph] of RBC Investments and Management. Please proceed sir.

Myles Odaneill

Good morning gentlemen.

Jeff Barnet – RBC Investments

I always put in a punch for a non-5:30 conferences I might add. Is it appropriate to look at the company and look at its using EPS just for the current moment as an example of what the company earned in 2006, the improvements that a rational process will bring and look at the earnings power of the company as it currently stands or is the company just unlikely to look like it does two or three years from now and, therefore, that is not really an appropriate exercise?

Myles Odaneill

Jeff, I am not sure what specifically you are asking.

Jeff Barnet – RBC Investments

If you look at the 2006 earnings number as where do you think the company will be in two to three years, as far as earnings power given a variety of the you know blocking and tackling that you will be implementing.

Myles Odaneill

I will okay. Let’s clear that. There are two parts to the question. What are we going to be able to contribute in terms of earnings improvement from a comprehensive turnaround plan and all the initiatives that are embodied in that and I haven't yet shared the specifics of that. I think we will do it as we roll things out. We will do it as we roll things out. But that should be a significant number to us. The real fundamental question is what’s the base look like and at what point in time will we get back to that base. I can't tell you for sure that in the next 12 months we will be back to 2006 demand levels. We just don't have that visibility. I would fully expect we'll see recovery over a period of time, but right now what I told people for the next 18 months is they should assume the demand environment is what it is and we won't see any tail winds from volume recovery and we need to do what you characterized as blocking and tackling. If you were to make an assumption that by 2010, for example, that the underlying market was more stable and that the demand environment was comparable to '06, I think you could then take ’06 and add on to it the impact of variety of the significant issues that we are working out. But I’m not yet in a position to forecast that happening with that period of time.

Jeff Barnet – RBC Investments

And the profits by which you develop you develop both information and an organization capable of raising prices and an appropriate fashion to, you know, reflect reality in the marketplace. Is that a real cultural long-term thing? Or is that snapping people to in place of the year?

Myles Odaneill

It is a clearly a cultural thing, but it is something I’m approaching with a high sense of urgency. It is a center piece of one used to get changed here. We’ve brought in some outside help to really help us cull out of our system all the data we believe we need to have from a customer profitability standpoint, and from a segmentation standpoint when we look at different markets and different products. So that will help us have clear visibility into all of the data. Equally so, they are helping me to work on better defining what I would characterize as our internal business processes, how we do our pricing, how we make our adjustments, how we write our contracts, all things of that type of nature. Pretty basic stuff, but obviously we got caught pretty short in the last quarter and the kind of stuff that needs to get done. That has the cultural element to it, but it is stuff that I think we should be able to fix pretty quickly.

Jeff Barnet – RBC Investments

Thank you very much.

Myles Odaneill

Certainly thank you.

Operator

Your next question comes from the line of Mike Harrison of First Analysis. Please proceed sir.

Mike Harrison – First Analysis

I just wanted to follow up on the conversion costs. As I look on the dollar basis, the 83.2 million for the quarter is essentially flat from 83.4 million a year ago. Should we expect to see some reduction in that absolute kind of fixed conversion cost number or is that a number that is a little bit tougher to move? How should I think about that?

Randy Martin

Couple of things, Mike. You actually would see that number up if you converted the 2007 numbers to a comparable 13-week time frame. So, we did see some price or cost increases in that number during the year. But, I think the issues that Myles was speaking of are designed to address our conversion cost structures and cost footprint. I think you would that number will go down from the number we are currently at today.

Mike Harrison – First Analysis

And then, last question I had was on Packaging Technologies, you kind of categorized packaging as a relatively strong end market right now, but in the quarter volume declined 1%. Price mix was up 2%, but nothing compelling there. Can you explain why you still expect that to be relatively strong and maybe what kind of organic volume plus price plus mix we should expect for the rest of the year?

Randy Martin

Yes, I think first, Mike, I refer to it as "stable" as opposed to strong, but I think it is strong. There is that seasonality element. What we talked about at Creative in particular with their produce market, the berry market certainly has an impact on our first quarter seasonality. I think as we go forward, you will see that pick up both for Creative and for the comparable sort of markets that we have outside of that acquisition. So I think that is a factor. I think we did see some challenges in the color and compound group in that market, where we have seen some shares shifts back and forth. The sheet group certainly is stronger in that. And so I think you would say that should go stronger going forward.

You should look at the packaging segment. I kind of outlined it a bit. The 20% of that Spartech Packaging Technology group is non-packaging applications still, so that is having a drawdown effect on the growth of packaging. Packaging as a whole was up 1% in the quarter. It was a non-tax unit that pulled down to negative 1.

Mike Harrison – First Analysis

That was 1% volume in packaging for the quarter?

Randy Martin

For that segment, yes.

Mike Harrison – First Analysis

Okay. Thanks very much.

Operator

And we have a follow up question from Mike Sison – Keybanc Capital Markets. Please precede sir.

Mike Sison – Keybanc Capital Markets

Hey guys.

Randy Martin

Hi, Mike.

Mike Sison – Keybanc Capital Markets

Any change in interest rates that we need to be aware of going into – for the rest of the year?

Randy Martin

Not of any substance, Mike. About 70% to 75% of our debt is fixed. So, the interest rate challenges are -- or changes one direction or the other shouldn’t have really any impact on A: Unidentified Speaker:.

Mike Sison – Keybanc Capital Markets

No big deal there. Then, when you think about seasonality Q2 is always been your strongest, I guess when I think about this year. Would you expect a little bit different because of all the initiatives that you are doing maybe that you can have sequential improvements on EPS throughout the year? Or is that tough to do because of, say, seasonality?

Randy Martin

I think the seasonality makes it a little bit tough. I think the level and timing of some of these initiatives we are talking about will have more impact than even the seasonality. So, I think if we initiate some of those efforts which many of them do not have major investments to make, but they do have some costs related to them, that can have an impact on the near term quarters, but you certainly should see seasonal improvement when you go from first to second quarter in addition to what challenge or change we expect to make in those initiatives.

Mike Sison – Keybanc Capital Markets

Would the second quarter be sort of -- because of seasonality be the best quarter? Even aside all of improvements that you are going to make?

Randy Martin

We are not – that is, you know we are come out of the current environment we are in. We are improving from that. So that will be a benefit. Some of the initiatives we take could have some effect on that particular quarter. So I think it is just going to be looking at what timing impacts the second quarter for those different things. But as far as the underlying business and the seasonality basis, second quarter should certainly be stronger.

Mike Sison – Keybanc Capital Markets

When you take a look at the third and fourth quarter, though, considering that Greenville had a significant negative to those, to the EPS, I mean, you can make the case that you have improved on earnings year-over-year with a lot of that stuff out of the way. Right, generally speaking?

Randy Martin

Yes. Your comparables in the third and fourth quarter certainly get much -- better or much easier if you will in the third and fourth quarter.

Mike Sison – Keybanc Capital Markets

Okay. Great, thanks guys.

Randy Martin

Thank you, Mike.

Operator

It appears there are no further questions at this time. I would now turn the call back over to Mr. Myles Odaniell for closing remarks.

Myles Odaniell

Let me just close out by thanking everyone for joining us on this morning's call. Obviously, we have come through a pretty challenging quarter, but I want to leave a very clear takeaway that we are taking the performance seriously. We are taking specific actions that will communicate over the course of the next quarter and coming quarters in terms of improving our overall performance. We will look forward to keeping everyone updated on our progress in the coming weeks. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect. Have a great day.

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