AEP Industries Inc AEPI
Q2 2013 Earnings Call Transcript
Transcript Call Date 06/11/2013

Operator: Good morning. My name is Latanje and I will be your conference operator today. At this time, I would like to welcome everyone to the AEP Industries Inc. Second 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 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 Nick. Good morning everyone. Welcome to our second quarter conference call. I'm sure you've had a chance to read our release and I guess I would best describe the results as mix. Cash flow was strong over $24 million in cash flow and it's one of the better quarters that we've had in that respect. And please keep in mind that we do run the company for cash flow.

Volumes were down 2%, volumes were off for a number of different reasons. One, we are price managing all of our businesses and we advised -- on our first quarter conference call we advised that, that’s what we were doing and we intend to continue with our price management strategy, most likely for the rest of the year.

Volumes were off also negatively impacted by supply disruption in the movement and installation of equipment at both Webster and Transco. Volumes however are now recovering nicely. Poor economy had some effect I guess everybody saw that the manufacturing index was down to 2009 levels, clearly not good for growth. While volumes were down, they were in line with our competition; our peers said that it was either good or better than their performance.

I would like to just give you an update on two acquisitions. At Webster all the equipment ordered to upgrade this business is now installed and in production. There's some debugging of the equipment, is still taking place and that will probably could take place for another month or two, but meanwhile, wherein, all the lines are up and running in production. Majority of the staff reductions are now complete, and as are all the associated severance costs. The majority of costs to install the equipment are also now behind us.

Our second acquisition was Transco, a company in Canada that was primarily in the printing business which we considered to be a value added business. All the equipment has been removed from Transco. We moved three coextruded lines, again value-added equipment. One is up and running in our Mountaintop, Pennsylvania plant producing about 5 million pounds a year. The two other lines went into out Alsip, Illinois plant, both are installed. One is running and they are going through the debugging process; and the second line where we go into production after the first is in production. These lines are also rated at about 10 million pounds. So in total, we are – with that acquisition, we picked up about 15 million pounds of coextruded films capacity.

We also installed three bag machines in our Bowling Green, Kentucky plant which is where we do all of our present printing. There were two printing presses, one is up and – that we move. One is up and running, the second was damaged in transit delaying the startup from June to July 15. This was also a factor in our reduction in volume in the second quarter. And just an overview, when we started in 2012, we were operating two presses. We are now operating four presses. We are running all of the equipment 24/7 and when the fifth press is ready on July 15, it will also run 24/7 and at that point we will certainly debottleneck for all – to satisfy all volume purchases from the customers.

Both the Webster and Transco acquisitions were consistent with our strategy of value-added investing. Both represented a purchase of opportunity to AEP as we paid very little for each of those businesses and both acquisitions are working very, very well and should be a strong form of upside to the Company in the future.

I'd like to talk a little bit about resin. Resin year-to-date is up $0.09 a pound. There was a $0.04 price increase announced for May in addition to the $0.09 that did not hold. May actually stayed flat. Chem Data, the Bible of the industry published a minus $0.02 for May. They were wrong, they wrote a retraction. And that's just typical of what's going on as you described that market is volatile, even the experts can't predict on a month-to-month basis what's going to happen.

There is some supply disruption in June having almost no effect on AEP whatsoever and that may have an impact on whether or not the June pricing holds or not whether or not it holds in June. We don’t expect the price increase to go through, but pricing may remain flat again in June, that’s at least internal forecast, but at some point maybe June, but certainly by July or August we expect resin prices to start coming down. Again very, very volatile market for our resin products and very, very difficult to predict.

Also as resin increases, there is a normal lag to get our prices up, it's always that way. We have transactional customers and that takes anywhere from 30 to 45 days to get through, and we have contracts that range from 30 to 90 days. So that always has a negative impact on margins as our prices are going up, and of course, we’ve dealt with $0.09 year-to-date.

As these prices decrease, the negative impact is reversed and we are also looking at margin improvement in the second half of the year, as a result of resin coming down, certainly tied to resin coming down.

Again, just another comment on volume. Resin pricing has an effect on our volume. As resin prices go up, customers buy. They want to book and take as much inventory they can to beat the price increase when they are coming down, and just understand that in May everybody thought prices were coming down, including Chem Data, and customers weren't buying in May. So that also had an impact on our volume for the quarter.

We've continued to increase our capacity. We have extra capacity in some of our businesses, but in some of our businesses we're very busy and for the most part, that's where we are making our investments. We are in the process of installing 5 million pounds of capacity in our Griffin, Georgia plant. The line is installed and is currently being debugged, pretty much all of that would be into value-added products that that line will be making.

In stretch film, between now and let's say August, we will install – have installed about 15 million pounds of capacity in specialty films where we are out – on a stock item normally running about 10 days, we're out 40 days to 50 days on service. It's obviously – we are obviously busy there, and we need to add that capacity. Again, both of these investments are value added investments.

For 2014, we will be installing another canliner line in our Waxahachie, Texas plant. That's against – that will increase capacity about 8 million pounds. Basically we are selling every pound of canliners that we can make right now, and that 8 million pounds is to support the growth for 2014.

In our Matthews, North Carolina plant, we will be installing 10 million pounds of product in the first quarter of next year. By the way, the canliner line will also be in the first quarter of 2014. The Matthews line will be installed in the first quarter of 2014. And that line will support three divisions; Custom Films, Agricultural and Stretch Film. So we're very comfortable that, that line will run at a 90% rate.

We are also installing 10 million pounds of capacity in our Alsip, Illinois plant. That's Custom Films – for Custom Films first quarter of 2014. We are looking at operating that line at probably three quarters of capacity for the first year. And in Tulsa, Oklahoma, we are increasing capacity in our Stretch Film Division, but it's again in a specialty product where we are basically sold out, and again not in a good service position. It’s a value-added product and that line should be in production again in the first quarter of 2014.

That pretty much covers what we expect to be spending in CapEx for the year. Any additional spending would only come as a result of some contracts or some very good things happening for our Company.

That completes my portion of the presentation. I'm going to turn it over to Paul.

Paul M. Feeney - EVP, Finance and CFO: Good morning, ladies and gentlemen. Net sales in the second quarter decreased $12 million to $284 million. The decrease was a result of a 2% decrease in average selling prices combined with a 2% decrease in sales volume resulting from the Company's efforts to price managing certain product line. The selling price decline was a result of lower resin prices in the current quarter.

Volume in the quarter was 241 million pounds, a reduction of 5 million pounds from the 246 million pounds sold in the second quarter of fiscal 2012. Net sales in the first half of fiscal 2013 decreased almost $13 million or 2.3% to $551 million from $564 million in the prior year.

The decrease was the result of 1% decrease in average selling prices combined with 1% decline in sales volume and the company's price management activities.

Year-to-date volume was 470 million pounds down 7 million pounds from the 477 million pounds sold in the first half of the prior year.

As noted in our 10-Q we no longer are forecasting a 30 million pound volume increase in 2013. Sales attributable to our Transco acquisition were negligible in our first quarter. But as equipment was installed and product was qualified Transco sales grew to about $4.1 million in the second quarter.

We expect that will continue throughout next quarter six months. Gross profit for the second quarter decreased $7 million to about $36 million. Adjusted for LIFO reserves increases in both quarters there was a gross profit decrease in the current period of about $2.8 million versus the same quarter of the prior year. Adjusted for LIFO, gross profit per pound in the current quarter is $0.191. In the second quarter of prior year, adjusted gross profit per pound was $0.198.

Book gross profit for the first half of 2013 increased $600,000 to $78 million. This includes a LIFO reserve increase in the current year-to-date period of $7 million as compared to a LIFO reserve increase in the prior year's fiscal period of $8.9 million. Adjusted for the increase in LIFO reserve in both periods, there was a gross profit decrease in the current period of about $1.3 million versus the first half of the prior year. Adjusted for LIFO, gross profit per pound in the current year is $0.181 per pound. In the prior year, gross profit per pound adjusted for LIFO was $0.182 in the first six months of 2012.

Operating expenses for the second quarter of fiscal 2013 were $31 million, an increase of $1 million compared to the same quarter of the prior year. For the first six months of fiscal 2013, operating expenses was $60 million, an increase of $400,000 over the comparable period of the prior year.

Operating cost increases in both 2013 periods are primarily due to increased share-based compensation costs associated with the Company's stock options and performance units. Severance costs and increased plant transportation costs related to Webster activities partially offset by volume increases and positive synergies related to Webster. There are no significant changes to interest expense between the periods, however, details related to interest expense are provided in our 10-Q.

Net income for the three months ended April 30, 2013 was $200,000 or $0.04 per diluted share as compared to net income of $4.8 million, or $0.87 per diluted share in the three-months ended April 30, 2012.

Net income for the six-months ended April 30, 2013 was $7.1 million, or $1.28 per diluted share, as compared to net income of $5.2 million or $0.94 per diluted per diluted share for the six-months ended April 30, 2012.

The significant factor affecting net income between all of these reporting periods is the result of LIFO reserve fluctuations. As Brendan noted, we run the Company for adjusted EBITDA, which was a fairly stable $24.4 million in the current quarter and $42.3 million year-to-date as compared to $24.4 million and $40.1 million in the same period of the prior fiscal year. The amount of cash dedicated to our discounting program remains around $50 million.

CapEx in the second quarter was around $11.6 million and is $26 million year-to-date. CapEx is expected to be in the area of $36 million for this year. Current availability is around $135 million.

And with that we will now take questions from participants.

Transcript Call Date 06/11/2013

Operator: Daniel Khoshaba, KSA Capital Partners.

Daniel Khoshaba - KSA Capital Partners: Brendan, you had mentioned on the call that there were some transportation challenges in moving equipment around and other factors. When do you think those issues will resolve themselves and also you mentioned that to some degree they were fairly material?

J. Brendan Barba - Chairman, President and CEO: Well, maybe I should get a little bit into the detail of what caused that. Put an expansion on our plant in Waxahachie, Texas to support our canliner growth and with that, we put in racking systems to hold the stock, the canliner business that we're in is basically a firm stock business, and if you want an idea of the magnitude of it, we're adding 8,000 rack positions or 8,000 skids. We had nothing but trouble from the town of Waxahachie. They slowed us down to a point where we had no place to put the finished goods. We had to – until the racks were complete, until we received all of the approvals; and by the way, they also delayed the building which was also delayed, and we had equipment coming in, so we were right up against the limit. We did at our end of it and the town didn't. So we took millions of pounds of product and five major customers and moved them to our Montgomery, Alabama plant at a cost of probably $0.025 a pound. We continue with that – all the lines are running, they are debugging lines, the racking won't be done probably for – most of it will be done in July. There's – about another 1,000 of the 8,000 plus comes in August. Probably in August or July, we will start moving some of those customers back, and again we will incur the cost to remove the product and ship it back to Waxahachie. And that's also been somewhat disruptive in terms of service because it's a couple of days to get the product out of the plant, put in stock, put away et cetera, that's another day. So it slowed us down on service issues with the customers.

Daniel Khoshaba - KSA Capital Partners: And then just a follow-up to that maybe. Your volume in the quarter was down, I think, 1% to 1.2%, correct?

J. Brendan Barba - Chairman, President and CEO: Yes.

Daniel Khoshaba - KSA Capital Partners: If I look at all of the companies that we track in packaging, particularly in films, that was certainly no worse and in many cases a lot better than most companies that reported their second quarter numbers. And so I guess – you don't think you lost any share, do you?

J. Brendan Barba - Chairman, President and CEO: Well, when you say lost any share there's in every months every quarter there's bids that we participate in. That can be transactional bids where the customer says I need two truckloads this month, or it can be contractual. And those bids are where we are not – because we are price managing the business, those bids are where we are not as sharp as we used to be, and we lose some of those bids. That's literally dozens and dozens in every month. So I couldn't – it might even be 100 a month.

Daniel Khoshaba - KSA Capital Partners: But that's part of the strategy that you really began implementing not last quarter, but the last couple of years?

J. Brendan Barba - Chairman, President and CEO: Yes, we've been more in price management and stating that we want to improve margin et cetera. And that's a gradual process, it takes time.

Operator: Andrew Cash, SunTrust Robinson Humphrey.

Andrew Cash - SunTrust Robinson Humphrey: Just a couple. On the resin, if I heard that correctly, $0.09 per pound increase year-to-date. Was that all polyethylene or that include some other plastics as well?

J. Brendan Barba - Chairman, President and CEO: Well, we typically talk about polyethylene. Those increases were polyethylene. I don't know if we had another. But PVC prices went up also, but not as much as $0.09. I don't have that specific; if you want it, I can get it for you.

Andrew Cash - SunTrust Robinson Humphrey: No, that’s okay. I am just curious if, with such a big move and on a percentage wise that’s a big move for short period of time and based on what you were saying earlier about pre-price increase buying, I guess I'm a little surprised that the volume wasn’t up year-over-year, or is it just that the economy is that bad out there?

J. Brendan Barba - Chairman, President and CEO: Well, there is a combination of things that went on. Again, we did not get all the volume out the door from either Webster or Transco as a result of some disruption of supply, and I'm telling you now that that is recovering nicely as we speak. We did price manage the business. How much of that is related to the general economy versus price managing the business versus the supply disruption, I could never give you that as a percent of the 2%. But all three had some impact on what's going on.

Andrew Cash - SunTrust Robinson Humphrey: Just finally, I don’t know, do you have any exposure to the export market outside of North America?

J. Brendan Barba - Chairman, President and CEO: We export virtually nothing.

Operator: Gunnar Hansen, Sidoti & Company, LLC.

Gunnar Hansen - Sidoti & Company, LLC: Some of the questions have already been addressed, but just in terms of some of the lowered sales guidance for the remainder of the year. I mean, I know it's kind of hard to break down. But any sort of insight into how much of that is tied to some of the end market demand versus some of the prolonged equipment installation with Transco and Webster?

J. Brendan Barba - Chairman, President and CEO: Well, I think that at the end of June and certainly by July all operating issues with -- July 15, the Transco – the last Transco press gets installed, and then we would be in full-service for all of the Transco volumes and customers. Webster, all the lines are running and they are debugging lines. Last week the manufacturers, two manufacturers were in there assisting us with maintenance issues and debugging. We put in six extruders there with automation, and it's pretty complicated. That will get better each week as we go along. The last three weeks, we've increased capacity there by 100,000 pounds a week. So we're catching up nicely on that.

Gunnar Hansen - Sidoti & Company, LLC: Obviously, any sort of insight obviously with some of the delayed equipment and supply issues, maybe the potential loss of customers. I mean, how have kind of those renegotiations kind of taken place thus far?

J. Brendan Barba - Chairman, President and CEO: Well, every customer that we have can pick up the phone and request the price. Contracts are contractual. They always have resin escalation clauses in them, up and down. But we're bidding every week. Every week something, sometimes we pick up some, sometimes we lose some.

Gunnar Hansen - Sidoti & Company, LLC: I think you mentioned it in your earlier comments, but in terms of trimming down the Webster workforce, is that all about complete at this point?

J. Brendan Barba - Chairman, President and CEO: In our Waxahachie plant, we are about 20 – probably, I would say less than 30 people to go overall between Montgomery and Waxahachie, it's going to be in the 20 to 30 range, and we're done.

Gunnar Hansen - Sidoti & Company, LLC: And lastly, just in terms of some of the capital expenditures you guys are looking for primarily in the first quarter of '14, any sort of kind of initial guidance in terms of CapEx for that year?

Paul M. Feeney - EVP, Finance and CFO: We're looking at CapEx for 2013 to be in the area of $36 million. It’s $26 million already, and we are expecting the additional $10 million to be cleanup of activities involving Webster and Transco, along with initial deposits on the lines that Brendan just spoke about, which will be installed in the first quarter of 2014. We're looking for an additional $10 million or thereabouts.

Operator: Roger Spit, Bank of America.

Roger Spit - Bank of America: Could you just expand on the production qualification delays that was mentioned in the release in the 10-Q, please?

Paul M. Feeney - EVP, Finance and CFO: Do you want to do that?

J. Brendan Barba - Chairman, President and CEO: Sure. Which – in terms of Transco?

Roger Spit - Bank of America: Yes.

J. Brendan Barba - Chairman, President and CEO: Transco volume was dramatically affected. Most of the business that we purchased there, let's say, is printed products. That was the bulk of – and that's probably the main reason we brought the business. That capacity is half. We only were able to install one press. The second press won't run until July 15. So we will not be back to high service levels until sometime after July 15.

Paul M. Feeney - EVP, Finance and CFO: Roger, I think you're talking about the product qualification. What that really boils down to is after the equipment has moved from Transco to AEP and installed. You still have to qualify the product, the customers come in and they check the colors they check the lab. They are on new...

J. Brendan Barba - Chairman, President and CEO: It slows down our ability to…

Paul M. Feeney - EVP, Finance and CFO: By the way the customer doesn’t call in and order for a truckload. We have to get qualified so to speak. We are a new vendor to them, Transco is an existing vendor we took the machines out of there, we are not even making those products on those machines so we have to requalify.

J. Brendan Barba - Chairman, President and CEO: I think some of that would slow down but the majority of it has to do with not having printing press available.

Roger Spit - Bank of America: Chem Data showed LLDPE prices rising $0.04 in March versus February and stayed flat in April. Given that resin prices were relatively flat in the last month of the fiscal quarter. Would have thought perhaps the change in LIFO inventory reserve might have been smaller than the 10 million that you showed. I know this is a very complex issue but just thinking about it that way?

Paul M. Feeney - EVP, Finance and CFO: No, it's really not that complex. There was a $0.02 increase announced for May and we bought into that increase. So we bought in April which was the last month of our quarter. We loaded up on inventory at the old prices anticipating a price increase, a $0.02 increase that was forecasted for May. That $0.02 increase didn’t happen. So all that happens to us is we bought – I don't know, 50 million pounds of resin that we will use up in less than two weeks, that's all that happened. But what was it, an inventory? The answer is yes, it was an inventory. Did it absorb LIFO reserve? Yes, it did. It created a lot of LIFO reserve.

Roger Spit - Bank of America: Lastly, I know you've spoken a little bit about this already in the call, but – so to make flat volume growth for the fiscal year, it looked like the fiscal second-half, you have to be up somewhere on the order of 2.5% on a year-over-year basis from fiscal 2012. I know you've got some new lines coming in, but given what you've just done for the first half of '13, can you just speak to the challenges on that?

J. Brendan Barba - Chairman, President and CEO: It's a challenge. We're not getting a very good economy to do it in. We're trying to price manage the business. There's no question we can increase the volume if we were to kind of drop our draws on the pricing. It's a very fine line, but I'm still optimistic that we will increase the volume for the year. Can we get back to flat? I wouldn't want to make that statement right now.

Operator: At this time, there are no further questions. I would now like to turn the conference over to Mr. Barba for any closing remarks.

J. Brendan Barba - Chairman, President and CEO: Okay, thank you all for calling in. If you have any questions that you think of later, as usual Paul and I are always available to answer those questions. Thanks again.

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

Operator: Thank you for participating in today's conference call. You may now disconnect your lines at this time.