Q2 2009 A. Schulman Earnings Conference Call - Final.(Broadcast transcript)

OPERATOR: Good day, ladies and gentlemen. Welcome to the second quarter 2009 A. Schulman earnings conference call. I will be your coordinator for today's call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session after the presentation.

Before we begin, the Company would like to remind you that statements made during this conference call which are not historical facts may be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. In addition, this conference call contains time-sensitive information that reflects management's best analysis only as of the date of this live call.

A. Schulman does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information, or circumstances that arise after the date of this call. For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to A. Schulman's quarterly earnings releases, and periodic filings with the Securities and Exchange Commission.

I would now like to turn the presentation over to Mr. Joe Gingo, CEO. Please proceed, sir.

JOE GINGO, CEO, A. SCHULMAN: Thank you.

As noted in our release, December and January were a continuation of the severe demand slowdown which began in November 2008. We saw some improvement in February, enough to earn an operating and net profit for that month, but certainly not enough to offset the losses of the prior two months. We continued to aggressively pursue our ongoing strategy to cut costs, realign our global resources, and focus on higher margin businesses. The savings we already achieved from these actions helped alleviate the negative impact of the market slowdown. And of course, we will continue to benefit from these actions going forward, which will strengthen our profitability as the markets recover.

In North America, as a result of our restructuring and cost reduction efforts, we were able to almost completely offset the gross profit decline that occurred because of the lower market demand. If we had not taken these actions, our office for the quarter would have been 4 million to $5 million higher.

In Europe, our cost and workday reductions at our manufacturing facilities and our SG&A reductions could not fully offset the drop in volume and the decline in currency exchange rates. We believe that we were able to maintain our market share during the quarter, even though orders in both Masterbatch and Engineered Plastics businesses were significantly below historic levels. Another positive sign is that we experienced modest recovery in February for Masterbatch volume in both Europe and North America, but global demand for Engineered Plastics remain at a very low level.

Once again, our cash generation was very strong. Cash flow from operations for the first six months of fiscal 2009 was almost 90 million greater than it was for the same period a year ago. This improvement was partially a result of our lower operating levels, but for the most part, it was due to our successful working capital initiatives which we started last year. With cash on hand of more than 140 million and available credit lines of more than 300 million, our current liquidity position can be fairly described as excellent and we do not anticipate any liquidity problems.

On that note, I will turn it over to Paul DeSantis, our Chief Financial Officer, to discuss the financials in more detail. Then I will return with some comments on the business outlook and our strategy going forward. Paul?

PAUL DESANTIS, CFO, A. SCHULMAN: Thanks, Joe. Good morning everyone. During the fiscal second quarter, cash and liquidity continue to improve although weakness in demand drove severe and unprecedented volume reductions. Our cost savings initiatives including plant capacity reduction helped to partially offset the negative profit impact resulting from those volume reductions.

In reviewing the quarter, I would like to cover four main topics that had a tremendous impact on our performance. They are, 1) the economy's affect on our volume and margin declines, 2) North American performance, 3) cash flow from operations and liquidity, and 4) non-operating costs and restructuring plans.

Let me start with volume and margin declines. If you recall, for the first quarter we saw volume down almost 28%, with half the shortfall occurring in November as the markets began to severely deteriorate. November itself was down 38% from the prior year. December and January continued to mirror the economies weakness with volume down dramatically.

If you compare each month to the same month of the prior year, December volume was down 26%, and January volume was down 32%. We started to see some recovery in February compared to January, however volume for the month was down 29% to the prior year. On an absolute basis, volume grew from December to January, and January to February. February was quite different from December and January. December and January saw margin declines, operating and net losses.

February saw a reversal of this trend with gross margin improvements, positive operating earnings, and positive net income. Unfortunately, while February's results were encouraging, they were not good enough to overcome December and January's losses. During the quarter, volume declines were most pronounced in North America, where volume decreased overall by more than 45%.

The North American Engineered Plastics business was down almost 64%. I would like to note 24 percentage points of this decline were planned, as we had taken actions in 2008 to reduce capacity in North America, by selling our Orange Texas facility, and closing our Canadian facility, while walking away from low margin business.

European volume declined approximately 24% for the quarter severely impacting earnings. In spite of these volume declines, we believe we have not lost market share. In fact, we are hearing from some customers that they are looking to Schulman to supply more of their business because of our solid capital structure versus that of our competitors. Of course, our estimate of that sentiment is very difficult to measure. In addition to volume declines, price and mix, as well as currency exchange contributed to even steeper sales declines.

Sales for the quarter were down 43% on the 29% volume decline, with currency exchange accounting for an additional 8% of the decline, and price and mix accounting for the remaining 6%. The price and mix decline was primarily due to lower selling prices as a result of declining commodity prices and competitive pressures. The 8% currency decline was primarily the result of weakness in the Euro, which averaged 1.34 over this year-to-date reporting period compared to 1.45 last year.

Gross profit was also impacted by the volume decline. Gross profit was 28.4 million in the quarter, compared with 55.4 million last year. Excluding non-operating items, gross profit for the quarter was 28.9 million compared with 55.2 million. Although plant costs are down approximately 25% as a result of our proactive capacity reductions, the savings, though substantial, were not enough to completely offset the decline in volume, which as I said was a primary driver of the gross profit shortfall.

The gross profit margins have also been challenged, with the quarter reporting in at 10.4 percent of sales compared with 11.5% last year. This shortfall was primarily driven by North America as European margins were relatively flat at 13.4%. In both cases the margin numbers were driven by volume shortfalls, which were so severe that …