AEP Industries Inc AEPI
Q1 2013 Earnings Call Transcript
Transcript Call Date 03/13/2013

Operator: Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the AEP Industries, Inc. First Quarter 2013 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. (Mr. Lamplough), you may begin your conference.

Nicholas Lamplough - IR: Thank you. Before we get started, I would like to remark briefly about our forward-looking statements. Except for historical information mentioned during the conference call, statements made by the management of AEP Industries are forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks included, but are not limited to, risks associated with pricing, volume, and conditions of the markets. Those and other risks are described in the Company's filings with the SEC over the last 12 months, copies of which are available from the SEC or may be obtained from the Company.

Today's format will be as follows; Brendan Barba, Chairman, President and CEO will discuss operations and then Paul Feeney, Executive Vice President, Finance and CFO will discuss the financial results. After the prepared remarks, Brendan and Paul will be available for questions.

So, without further delay, I would like to turn the call over to Mr. Barba. Brendan?

J. Brendan Barba - Chairman, President and CEO: Thank you. Good morning, everyone. Welcome to our first quarter 2013 conference call. Our results for the first quarter were strong. Typically the first quarter is our weakest, and we’re really encouraged by the strong start.

Volumes for the first quarter were down slightly in the November-December-January period. Our typical slow first quarter, this is always the period that is slowest for us. Most of the lost business has to do with us price managing at just about every business that we're in right now. We're not concerned about it. Our second quarter will be very strong, and for the year we expect to achieve our overall sales plan. We also are not expecting any help from the economy. We have to do it on our own.

To talk a little bit about resin; we forecasted in our year-end call that resin pricing, would remain very volatile. This has certainly turned out to be accurate. On January 1, we were increased $0.05 pound and AEP has increased prices across the board and we've actually added some margin on those price increases. On 3/1, prices are up $0.04. This seems to be holding and we’ve again announced price increases in all of our operating divisions. There is a third increase announced for April 1st. We don’t see this increase holding, but we’ll have to keep an eye on it and for the year, we’re forecasting that prices will be up as they have been. And then somewhere around the next quarter, we expect prices to start coming down. And over the course of the year, we’re looking at pricing being about neutral.

This is a very, very difficult thing to do. We do it every year. We really use guidance primarily from our three international or global suppliers of resin; Exxon, Dow, and Chevron, but we also work with two others to try to put together these forecast. Again, very, very difficult to do.

On the acquisition front thus far with Webster, we have completed the installation which is the major portion of what we’re doing in Webster on 10 extruders. They are all installed now in production. They were installed on time and on budget. By the end of April-May period, all other miscellaneous converting equipment will be installed. All major customers are on board. We didn’t lose any customers. We had no interruption of service or quality. In February, we integrated Webster on to our QAD IT system. The acquisition was consistent with our strategy of value-added investing. It made us a player, a real player in the retail market, which is about a 1.5 billion pounds of film a year.

We believe that we purchased the business set up at a very, very, very good price and in the end of April-May time frame we will have achieved our objective of major cost reductions, primarily in staffing, and we expect staffing to go from about 715 people at the time of the acquisition to in the 350 people range.

Then we did – I am going to say on timely basis a second acquisition. We were still really digesting the Webster deal, but the deal for Transco came along, who had business in Montr�al, Canada. Unlike the Webster deal, we are moving out of Canada and moving all the equipment there into our Bowling Green, Kentucky plant, which is where we produce our printed films, which is what most of this business consisted of.

We purchased this also at what we consider to be a really, really good price. We picked up to 30 million pounds of existing business. It appears at this point that all the customers are onboard. We don't believe we have lost any certainly major customers. This really makes us a supplier in the printed marketplace. Again, it's a value-added business and it is consistent with our value-added investment strategy.

Our print capacity in Bowling Green went from two presses and about 20 million pounds of capacity to five presses and 50 million pounds of capacity. Four presses are in production and the fifth press is in transit from Transco. A part of the deal was also three co-ex lines with their capacity of between 15 million and 20 million pounds of film capacity and again value-added business. There is some miscellaneous equipment that is also out of the plant and now in our Bowling Green, Kentucky plant. The three extruders will be going to our custom films plants. One in our Mountain Top, Pennsylvania plant and the other two will go into Alsip, Illinois and we expect all of these lines to be in production during the April-May period.

We also continue to grow our existing businesses and in May and June added about – will add about 10 million pounds of capacity in two of our operating divisions. We also have ordered some equipment for our custom films business and that will be about 10 million pounds of capacity and it will be in place by the last quarter of this year, and another 10 million pounds of capacity added in our North Carolina plant that will service our custom and stretch business. Both of these lines are badly needed and we expect that we will operate at about 90% of capacity.

Finally we were adding again in specialty films business within our stretch business, we’re adding about 10 million pounds of capacity and that will be in place between June and August. I’m also happy to tell you that we are really going to be completely finished with just about all of the installations in the April-May period. It was very, very difficult even despite some spectacular work by our manufacturing people and just about everybody involved in the process to put this thing together, but we do need a rest. So, we’re going to be resting let’s say in the up and coming months to kind of let’s say just fine tune our business.

In closing, I’d just like to say that we’re really, really confident about 2013. We think we’ve made a lot of good moves and we just feel very strongly about how well we’re going to do in 2013, which of course creates shareholder value. That completes my portion of the program, Paul.

Paul M. Feeney - EVP, Finance and CFO: Good morning ladies and gentlemen. Just a few very, very quick work having to do with the financials. Net sales for the first quarter declined about $500,000. The 0.2% decrease in the Company net sales was really the result of a very, very small increase to average selling prices, offset by a very, very small decrease in sales volume, and this results from our previously stated desire to more aggressively price manage our business.

Volume in the quarter was 229.5 million pounds, as compared to 231.3 million pounds sold in the first quarter of 2012. As previously noted, we expect volume in 2013 will exceed 1 billion pounds on a year-over-year basis, and net gain will exceed 3%.

Book gross profit for the quarter increased $7.8 million. This includes a LIFO reserve decrease in the current quarter of $3.1 million, as compared to a LIFO reserve increase in the prior year’s quarter of $3.3 million. Adjusting for the LIFO reserve movement in both quarters, there was a gross profit increase in the current period of about $1.4 million versus the same quarter of the prior year. The improvement in gross profit is a result, again, of our price management activities, as well as our never ending cost control activities.

Book gross profit per pound in the current quarter is $0.185, and was $0.15 in the prior fiscal quarter. Adjusted for LIFO, gross profit per pound in the current quarter is $0.17, as compared to $0.16 in the prior year. Operating expenses decreased $500,000, due largely to our cost containment efforts really across many, many expense categories. Our 10-Q contains further details concerning these cost decreases.

Interest expense for the first fiscal quarter decreased $300,000, resulting from reduction in credit line borrowings, partially offset by increased rates paid under our credit line. As you all know, we operate the company to maximize adjusted EBITDA, which was $17.9 million in this quarter, as compared to $15.3 million in the prior year.

Net income for the current period is $1.25 a share, as compared to $0.06 a share in the prior fiscal quarter. The current period includes an after-tax non-cash profit applicable to the Transco acquisition of about $1 million. The amount of cash dedicated to our discounting program continues to be in the area of $50 million.

CapEx in the first quarter was around $14.5 million, and is expected to be in the area of $35 million by year-end. CapEx for the period includes a $3.4 million expenses on the purchase of our Bowling Green plant, $1.6 million to relocate the Transco assets, and $5.5 million related to Webster projects that were initiated in 2012. Our average availability continues in the area of $130 million to $140 million over the month. There is some volatility in that that results from our resin payments, and in this quarter, of course, the debt payment – I mean, in this month, of course, the debt payment.

So with that we will throw this conference call out to questions. Both of us are available to answer the questions you may have.

Transcript Call Date 03/13/2013

Operator: Richard Kus, Jefferies.

Richard Kus - Jefferies: So couple of questions. Can you talk a little bit more about the volume decline that you saw in the quarter? We know it was only slight, but I’m just looking for reasons behind it. Was it more customer destocking or some guys delaying purchases, or what was going on there?

J. Brendan Barba - Chairman, President and CEO: I think it's all of those things, but some of that did take place. Customers in December really don't want any inventory for their year-end. That has always been an issue for us. But a lot of it has to do with us price managing the business, so I would say that would outweigh the other factors.

Richard Kus - Jefferies: So is that to say that these customers took their business elsewhere temporarily, like is that (indiscernible) share loss?

J. Brendan Barba - Chairman, President and CEO: No, it’s all transactional businesses, and some of it has to do when we announce a price increase, some people will take an order that will – they will extend it. They’ll take the order. We have a cutoff date, and we won’t take the orders after the cutoff date mainly because we don't want to draw the price increase, other people do it.

Richard Kus - Jefferies: It makes sense not to take business at a loss, no doubt about it. Now you guys did a nice job taking out cost over the last couple of quarters. How much more cost do you have to take out there?

J. Brendan Barba - Chairman, President and CEO: Paul, you’re probably in a better position to answer this. We have a significant – I don’t have the total staffing. I guess we can get that for you. But most of the savings is going to come from the cuts from 715 to about 350, and it really – April 1 is a lot of people come out. Can you answer that, Paul? Do you want to get back to him on that question?

Paul M. Feeney - EVP, Finance and CFO: We’re expecting a further reduction of let me call it headcount somewhere in the area of maybe $2 million. About $700,000 of that will be in the corporate G&A area, while the rest of it will be in the manufacturing area, where we will begin to realize the full impact on these 10 lines that Brendan was saying that we installed. Now, in this period, however, just understand that there will be additional expenses that will result from severance payments. So there will be some severance payments made, but basically we’re expecting about $2 million of labor cost to disappear, I must say, by June.

Richard Kus - Jefferies: Any idea how much those severance payments are estimated to be at this time?

Paul M. Feeney - EVP, Finance and CFO: Right now we’re looking in the area of about $400,000.

Operator: Gunnar Hansen, Sidoti & Company.

Gunnar Hansen - Sidoti & Company, LLC: Just in terms of all that Transco equipment, kind of, being transported in place, I guess, in the next few months, was there any production out of those pieces of equipment, I guess, in the first quarter?

Paul M. Feeney - EVP, Finance and CFO: No.

J. Brendan Barba - Chairman, President and CEO: Not much really. There was a little bit – well, it’s actually more from Transco facility, so the answer is, I guess, Paul’s right now.

Paul M. Feeney - EVP, Finance and CFO: There was about $1 million of sales of Transco to Transco customers in the first quarter, but that was product that had already been manufactured by Transco prior to the acquisition.

Gunnar Hansen - Sidoti & Company, LLC: Just to kind of get back to the volumes, in any way you guys can kind of quantify, I guess, some of the business that you guys walked away from just to do some of the price point out?

J. Brendan Barba - Chairman, President and CEO: No. There’s so many transactions involved. It’s not the contract customers. It’s not the – it’s the transactional customers and it happens in nine different divisions. So, it's impossible to say how much of it – but that’s where our sales group is attributing to the majority of volume is increased. But I think we were clear for the year. We intend to hit and we will hit our sales plan.

Operator: (Bob Franklin, Prudential Financial).

Bob Franklin - Prudential Financial: Do you have a sense of where your spreads over resins costs with respect to historic levels and I am guessing that’s a moving target given your acquisitions, but – if you can (dwell) on that, I would be grateful?

Paul M. Feeney - EVP, Finance and CFO: It is a moving target, Bob. We think the real operative number there to look at is the gross profit per pound and I have given that to you. On a book basis it’s $0.185 in this quarter compared to $0.15 a pound in the same quarter over prior year, and on a LIFO adjusted basis it’s $0.17 a pound compared to $0.16 a pound in the prior year.

Bob Franklin - Prudential Financial: But over a longer period of time, not just quarter to quarter, what do you think is an appropriate target for your kind of business?

Paul M. Feeney - EVP, Finance and CFO: We think normalized and when I say normalized, I am adjusting that as our book of business becomes a less commoditized. Right now, I would expect normalized and there again I am talking about a normal economy. I don’t think we have been in the normal economy since 2007-2008. So, maybe we're involved in a new normal, but I'm talking about the old normal. I would expect gross profit per pound to be on between $0.20 and $0.22 a pound. So, I mean really you could probably add 20 to – on an annualized basis $20 million to $30 million to what we would consider gross profit at the year-end. We're not expecting to earn those kinds of number this year. We still think that the normal profitability of this business is constrained by the economy. But we're very comfortable and working with this economy right now.

Bob Franklin - Prudential Financial: Was that as a segue – do you have any sense of in the current quarter, which way the economy is going? Is it flat or better or worse?

J. Brendan Barba - Chairman, President and CEO: We don't really have the ability to that. We look at the government numbers. With us, the first quarter is particularly difficult. It's our slow period. So, I don't think we have a honest way of answering that question.

Bob Franklin - Prudential Financial: No feedback from the channels, from the customers saying things are getting better, things are getting worse, things still stick?

J. Brendan Barba - Chairman, President and CEO: Flat, people are saying businesses, not good. Flat is maybe a better way to describe it, that's the word that I here most often.

Operator: At this time, we have no further questions. I'd now like to turn the floor back over to Mr. Barba and Mr. Feeney for any closing comments.

J. Brendan Barba - Chairman, President and CEO: Well, thank you everyone for attending the call and if you have any questions, both Paul and I will be available to answer them for you in the future. Thanks a lot.

Paul M. Feeney - EVP, Finance and CFO: Thank you ladies and gentlemen.