Magnera Corp (MAGN) 2003 Q1 法說會逐字稿

I’d like to thank you all for holding and welcome to your conference call today.

I’ll hand the call over to Ms. Hoover (ph.).

Madam, this is to advise all participants that at this time your lines are listen-only.

There will be a question-and-answer session later during your call.

Thank you so much for using [Front].

Good morning, I’m Vicky Hoover (ph.), Executive Assistant for Glatfelter.

I’d like to welcome you to this morning’s conference call.

Joining us on the call today will be George Glatfelter, Chairman and Chief Executive Officer;

John Van Roden, Chief Financial Officer; and Dante Parrini, Senior Vice President and General Manager.

Also in attendance are Bob Newcomer, President and Chief Operating Officer; and Mat Smith, Corporate Controller.

Today’s call will last approximately 30 minutes.

George Glatfelter will provide introductory comments and a brief discussion of our first quarter results.

John Van Roden will then offer additional comments of the quarter results and give a brief overview of his background.

Dante Parrini will review the operational side of the business.

George Glatfelter will then conclude with some closing remarks before opening the call for questions.

And now I’d like to remind you that the statements made today with regard to our future expectations may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although we make such statements based on assumptions, we believe to be reasonable.

There can be no assurance that actual results will not differ materially from our expectations.

And now I’d like to turn the call over to Mr. Glatfelter.

Thank you [Vicky].

Good morning and welcome everyone to our 2003 first quarter conference call.

I hope you enjoyed the musical interlude or the prelude to this call.

This is the new age bass culture.

Actually, the quarter was not reflective of the tone of the music at all for those of you who had to listen.

I thank you for participation in today’s call, and I hope that you had the opportunity to review the first quarter press release that was issued earlier this morning.

Generally, I’ve got to tell you I was pretty pleased with the performance of the company in what continues to be the most challenging business environment in my memory.

Although our numbers are certainly not where we would intend them to be in more normalized conditions, they stuck up pretty favorably, compared to the first quarter performance of others in this industry that I have had the opportunity to review.

The fact that our first quarter performance was generated in March part through the strong performance of our engineered products and long fiber and overlay business units, speaks directly to the strength of our specialized business model that was developed to support our vision of becoming the global supplier of choice in specialty papers and engineered products.

As you’ve noted in the press release, net income and earnings per share for the first quarter of 2003 were $26.8m and 61 cents respectively compared to $11.1m and 26 cents respectively for the first quarter of 2002.

Excluding one time benefits derived from asset sales, earnings for the first quarter of 2003 were $7.5m or 17 cents per diluted share.

John will take you through the financial performance of the quarter in greater detail in a few minutes.

I’d like to focus on a few highlights before I turn it over to John.

One of the highlights of the first quarter was completion of the sale of 25,000 acres of Timberland to the conservation fund.

The decision to enter into this agreement is directly tied to the strategy that we review with you on a number of occasions of maximizing the value of all assets on our balance sheet.

Sale of this land located in the ecologically sensitive area of the Eastern shore of the [Chest Big Bay] reflects our first effort at extracting cash value from our Timberland holdings.

I’m very pleased with the sale, which resulted in a pre-tax gain of $31.2m and is accompanied by a long-term fiber supply agreement to ensure continued control of cost of fiber to our Spring Grove, Pennsylvania facility.

The fact that this sale was structured in a tax advantage basis and preserves this land from future development, while continuing to support sustainable forest management, makes this type of transaction beneficial to all concerned parties and consistent with our core values of both financial discipline and environmental responsibility.

Finally, the quarter also highlighted -- it was also highlighted by the appointment of a new CFO for the company.

The selection of John Van Roden culminated several months of a thoughtfully constructed executive search.

John brings to the Glatfelter Company a combination of seasoning and experience that, I believe will be invaluable to our Management team.

As someone who has experience from outside the paper industry, his insights will provide a different perspective; one that should be beneficial to the successful execution of our specialized business model.

I am extremely pleased to welcome John to Glatfelter and to our Management team.

And at this point, I would like to ask him to make a few comments and introduce him to those of you on the call.

John.

Thank you George.

Given that I have been here all of 2 weeks, I will keep my comments fairly brief.

First, in regard to the quarter, the earnings per share of 17 cents, except the effect of the Timberland sale compares to 26 cents for the first quarter of ’02.

Roughly speaking, the main drivers of earnings from operations being lower by 9 cents from last quarter; our lower pension earnings of 4 cents, higher energy cost of 4 cents and an increase in pulp and waste paper cost of approximately 3 cents.

Just a quick word on my background;

I came here from two previous public company assignments, one in power and one in steel.

I am accustomed to capital-intensive and basic manufacturing enterprises.

I have spent 17 years at [Lukan] Steel, which has many of the same characteristics that we have here; in these products, some other size, need to focus on cost control, and a good balance sheet.

I am also pleased to see that we have a talented and dedicated team here, focused on taking cost out of the operations and bringing newer more valuable products to our customers.

I have been involved in successful outcomes in the past and I expect this to be the same, Dante.

Thank you John.

I would like to provide an overview of the performance of our 3 business units and production facilities during the first quarter of ’03.

First, I will start with printing and converting.

As you might recall from previous calls, this business produces premium quality fine papers for book publishing and envelop converting industries.

First quarter performance, we saw net sales at targeted levels for the quarter and we remained pleased with overall volume levels, which exceeded internal expectations by 1%.

Our people continued to do an excellent job given the challenging business conditions we are facing.

I think this speaks to the value of our specialized business model and to the leadership goal that we planned in our book publishing business.

In terms of near-term demand and pricing outlook, demand for printing and converting papers typically picks up during the second quarter.

We have successfully wrapped up several negotiations with key publishing customers during the first quarter of 2003 and we do anticipate demand to pickup as we enter the second quarter.

However, we are not convinced that this pickup will be as strong as in previous years.

And we believe that some uncertainty still exists in these markets.

The pricing outlook is relatively stable for this business unit as well.

The offset price increase that had been announced in the market for April has been deferred until May, and could move out even further based on what we’re observing.

And higher pulp and waste paper prices, if they have longer-term staying power, which is questionable, could also provide a platform to increase selling prices.

However, as you know, the real driver will be stronger demand.

Let’s go to engineered products.

This business produces customized solutions for the digital imaging, casting and release pressure-sensitive metallization in industrial specialty markets.

Products include inkjet papers, heat transfer papers, medical non-woven, playing cards, and postage stamps to name a few.

And in case you are curious, the Iraqi most-wanted playing cards are not on that pulp or paper.

In the first quarter, our net sales in volumes were 1% favorable versus target and we are also very pleased with this level of performance, since the first quarter is typically not the strongest for this business unit.

We forget about our backlogs in the status of a number of new product opportunities.

In terms of near-term demand and pricing outlook, demand for most engineered products is stable and improving.

The recently announced closure of the [Curtis Sign] Paper Mill in Milford, New Jersey may create additional opportunities for this business here.

Our pricing outlook is also stable.

Now, I will shift to long-fiber and overlay.

This business is a world leader in the manufacture of high quality filter papers for the tea and coffee markets.

Overlay papers for the illuminant industry and various specialty niche products are made from abaca fiber.

During the first quarter, we had another strong performance that exceeded internal expectations.

Net sales exceeded targets by 11%.

This is partially driven by a strong Euro and volumes exceeded target by 8%.

Strong seasonal demands for tea bag papers as well as continued strong demand for certain overlay papers drove this performance.

The growth in long-fiber and overlay is inline with our plans to completely exit the tobacco paper’s business by mid 2004 and we’ll support the technology investment in the rebuild of paper machine No. 9 in Gernsbach, Germany.

In terms of near-term demand and pricing outlook, demand for this business unit is relatively strong, going into the second quarter since we are still on our busy season.

The near-term outlook for pricing in this business unit is stable.

However, strong yield does create some downward pressure on pricing in certain regions throughout the world.

They ship to our operation pricing performance during the first quarter; our facility did extremely well on a consolidated basis and exceeded plane volume levels by more than 3%.

We are also pleased of our quality yield performance as that was also above the target.

In aggregate, we experienced very little market-related downtime during the quarter.

We did experienced some operational problems in Spring Grove during the month of February due to the excessive snowstorms that we experienced and it did cause us polluted air production and slightly curtailed some energy sales.

Our cost control performance, especially for controllable items was inline with internal targets for the quarter.

This remains a high priority for 2003 and we are critical in maintaining our performance as we look to mitigate high pulp waste, paper, and energy cost.

And as referenced earlier, the PM 9 rebuilding Gernsbach, Germany which will allow us to make more teabag and overlay papers on schedule and on budget.

So, in summary, I would say, all and all we are relatively pleased of our operational performance for the first quarter, significantly higher than expected pulp waste, paper, and energy cost; products at the gross margin level.

Our people doing outstanding job and quickly reacting to this situation by implementing a number of cost reduction initiatives for materially offset rising input cost.

With that I’ll turn it back to you George.

Okay Dante.

Thank you, to wrap things up I too would repeat that I was generally pleased with our first quarter results.

At the same time, it’s clear that the level of earnings that we’re currently generating have got to improve, far from what I or I’m sure anyone on this call would consider to be acceptable.

Like, virtually all other businesses that I know that are engaged in basic industry today, we continue to battle our cost price squeeze that has had a negative impact on earnings and free cash flow.

I continue to emphasize that improving cash flow and strength in the balance sheet reflect our primary short-term management priorities for 2003.

To this end, we are actively engaged in cost reduction efforts throughout the company including projects to realize economic value from our recently completed ERP implementation.

As I have mentioned in the past, we intend to limit future capital spending to levels below depreciation and we will continue to pursue opportunities to unlock the cash value of under-valued or non-strategic assets on the balance sheet.

We will continue to examine the entire asset base of the company to ensure that our practices and policies reflect the best means of generating long-term award to our shareholders.

Frankly, in my view, the remainder of 2003 does not review a significant change in the current business environment.

I think Dante’s remarks supported that statement.

We certainly are planning for near-tem improvement to occur.

On the contrary, we are managing this business as though one will not.

Having said that, it’s very clear to me that the Glatfelter specialized business model is performing well under the most challenging conditions that one could realistically imagine.

When this market does turn and I believe that it will, I believe that Glatfelter will be uniquely positioned, positioned to meet the growing needs of our global business partners in a value-added specialized papers and engineered products.

With that, I’ll turn the call back to our operator and ask that we open the lines for your questions today, [Ruth].

Yes sir.

If anyone has the question at this time, please press “*” “1” on your touchtone phone.

The first question is from Mark Connelley with CSFB.

Your line is open, sir.

Hi George, just a couple of things.

First, can you tell us whether you’re having any disruptions or issues because of SARS with your Philippines operation?

Thank you Mark.

We are not having any disruption at all as a result of that in the Philippines.

Okay and second your market share situation in the book business has over the last couple of quarters been looking pretty strong, is that still the case now?

You talked a lot about [glatfelter.com], can you give us a sense of what you think is going on in books right now?

I will start and then perhaps Dante who might be a little closer to the operational side of it might choose to support some remarks, but this is obviously core business for us; it is a business in which we are the acknowledged market leader here in North America.

A very important part of our value proposition is to continue to support our market share in that business.

I think we have done that very affectively;

Dante has talked about one particular mill that has closed up shop and as I think everyone is aware of there has been a lot of consolidation in the industry.

Particularly a lot of it targeted at some of the printing [audio gap] that have served this market.

I think that the fact that our market share is held up and in fact remained healthy during this downturn, reflects our recognition among our customer base that we are in fact the preferred buyer that our value proposition is one that supports there efforts and that our commitment to the business is one that they don’t question.

Dante, can you give us any further detail in terms of near term development.

Sure.

Mark, what we are seeing is the level of activity in book publishing from fringe mills; it is more active which is typically a sign of weaker demand and slower commodity markets, so people look to play in with the proceeds specialty markets.

Okay.

…which is why we spent a lot of energy in the first quarter to successfully negotiate our supply agreements with the key publishing customers and printers.

Our share in book continues at historically high levels and we are committed to maintaining at those levels.

Are you seeing price pressure there?

I made reference to the offset price increase that you see into the slide, into May and perhaps even past May.

And so you go up the food chain towards the trade-book papers that can have sort of a tangential impact on trade book pricing, but I would consider our book pricing to be stable.

Okay sure.

One last question on the finance, it is actually a multipart question.

Can you give us any sense of some of the components of cash flow to give us a better sense of what the picture looks like right now?

Pretax to working capital, you know, whatever you can share with us at this point?

Mark this is Matt Smith.

At this point, I guess what I can share with you is just our overall debt-to-equity ratio is about 35%.

Okay.

And we have not prepared our cash flow detail for release at this point so that will be included as part of our 10-Q.

Okay.

Thanks very much.

Sure.

The next question is from Mark Wilde with Deutsche Bank.

Your line is open sir, go ahead.

Good morning.

George I wondered, if first of all, if you could just update us on the prospects for any more timber sales over the next year or so?

Certainly Mark, I will be happy to do that.

As you know the 25,000 acre sale in Maryland reflected the first time we stuck our total new order with respect to the timber and asset and as I have indicated I am very well pleased with both the model that was used to drive that sale and the outcome and I can tell you that we are actively looking to continue to monetize our Timberland resources where it makes sense to do so.

That will be a high profile item throughout the remainder of this year, a couple of opportunities that of a smaller scale at this point to the one that we have just completed, that are currently in process as we stake.

So, that’s going to be a pretty active part of our business as we really look critically at that particular asset of the company and seek to extract economic value from it.

I think coupled with all that we are not going to [any dump] in that regard; that asset has a lot of value to us from a fiber perspective.

So, as we move forward and execute these sales or other arrangements that develop, we are going to cast a very careful eye to maintaining control over the plywood supply chain to the mill.

But I am very encouraged by -- again the Maryland transaction and by some of the learning that we developed from that about the availability of long-term supply contracts in our wood basket.

So, a short answer to your question is yes.

We are actively engaged in that and we will continue it through rest of the year.

Okay, and kind of follow-on on that question.

You have mentioned continuing to look at kind of all the all of the assets within the company.

Was that comment directed mostly at the Timberland or you are thinking about other assets as well?

Well Mark, it was directed across the span of the business.

We are, in fact, looking at all of our assets and where we have underperforming assets or assets that we feel otherwise can be redirected or monetized.

We are looking at those very critically.

I don’t that many, if any, have the magnitude that the woodlands space has at this point in time.

But there is nothing [inaudible] was saying frankly about any of the assets in the company.

If there is an opportunity to reallocate the value contained in those assets today elsewhere in the business, we turn it to shareholders to do whatever.

We have an open and creative mind in that regard.

Okay.

The second question I have, second general area is just if Dante Parrini can give us a little more color on what particular products are driving the volume growth and long-fiber and overlay?

I mean, if you look at both North America and Europe right now, it is kind of hard to imagine what would be growing at 8-9%?

Sure Mark.

As I look at the long-fiber and overlay performance, we have a couple of things going at the same time.

We have diversified our product offering in the long-fiber side.

And so we are experiencing growth within certain regions and with certain customers where our share has been below what our global share is.

So, that is just good old-fashioned hard work.

We also have had growth in coffee filters for example, where a couple of years ago, our coffee filer paper business was negligible and we have been very successful in partnering with one of the key consumer products players in launching a product line and we are sole source of supply with that particular customer.

We have also placed a greater level of emphasis on what we just call technical specialties or it is, in fact, it would be third segment within long-fiber and overlay.

So, if overlay papers, tea and coffee, and then there are variety of small niche types of products that could be made from abaca fiber that in past years, we haven’t perhaps focused on as actively as we needed to or could have.

But there is a stronger effort to further diversify that particular business.

I would also say that flooring overlay continues to grow at double-digit rates, especially in Asia.

There is a mix shift that has taken place, but we are able to supply the complete continuum of the overlay papers to serve that market.

Okay.

The third area I am curious about is just from the global perspective.

If you can give us some sense of, who you are compositing against in some of these markets.

So, if we think about a continued strengthening in the Euro, who is Gernsbach going to be primarily competing against in those markets?

I know, in tea bags paper, you have got at least one big competitor in the UK; just trying to get a sense of dynamics if Europe continues to appreciate.

Sure.

If you look at tea bag paper, there are few primary competitors who have operations in the UK and the United States. [Alstrem] being one who acquired [Dextra] and [Grera Compton] which is a privately held operation that has two facilities in the UK.

So, they both operate in both non-Euro currencies.

If you look at our overlay papers business, depending on which segments you talk about, [inaudible] specialty division is a big player in overlay papers.

And then you have a smaller handful of mills that can participate in the lower end of the overlay paper continuum whether that would be [Arshal Wagons] for example, and a few other smaller European players.

Does that help to answer your question?

That does Dante.

And then finally, could you can talk about whether you are seeing any -- there is any incentive for you to look at expanding in the book paper market in Europe?

You have such a big presence in North America, more and more of the printing and publishing companies are global players.

You see any real advantage in trying to move into that business in Europe?

You know, it is a very good question.

About five years ago, we had spent an awful lot of time in Europe and done a detailed market assessment to answer that very question.

And then what we have observed [audio gap] then and have continued to observe that a vast majority of the trade book papers that are used in Europe are more ground wood containing papers.

And so for uncoated free sheets players, the market opportunities are smaller.

The other thing is -- you have got freight considerations that play much bigger in this particular business because of the heavy basis way to the paper.

So, we continue to look for perhaps niche opportunities whether that might be in thin print papers for financial or legal publications and things of that nature.

But a very large opportunity for uncoated free sheet trade book paper in Europe from our perspective doesn't exist.

Okay.

Could you -- finally, can you update us on the capital spending plans for this year and next year?

Sure.

We stated that CAPEX for this year is around $75m, most of that is carryover.

That is related to a couple of major initiatives.

One so them is [Centaury] project in Spring Grove which is to help maintain environmental compliance; the other is an investment in the rebuild of [PM9] in Gernsbach, Germany, which will take our paper machine that currently or had made cigarette paper and enable us to make tea bag overlay coffee filter papers and other long-fiber papers.

And we wrapped up with our [ERP] system last year.

In terms of new appropriations for this year, it was significantly light compared to previous years and as we go into 2004, you will see a much reduced CAPEX expenditure below the levels of depreciations as George stated earlier.

Okay, thanks.

There are no other questions in queue at this time.

However, if anyone does have a question, please press "*', "1" on your touchtone phone.

Mr. Wilde, your line is again open, go ahead please.

Yes.

Can we come back to the issue of share repurchase, George?

If capital spending is going to be dropping off next year and with the balance sheet in pretty good shape already?

Well, certainly Mark.

Is there a question?

I guess, I am just -- I'd like to get your thoughts on maybe becoming more active in terms of shares repurchase if we go back to an earlier period, Glatfelter had been a pretty aggressive repurchaser of its own stock, you've been less so in recent year?

Well, I can speak to that.

Although admittedly somewhat obliquely, I would start by saying that first of all share repurchase is one way to return value to shareholders and as I have indicated in previous calls, we are looking at any and always to return appropriate levels of value to shareholders.

So with respect to share repurchase, it is something that we have been active in the past, it is something that, you know, we have not been very active in over the past couple of years.

Clearly, the balance sheet is a primary focus for us, as is improving cash flow in the business.

And the question of whether or not to enter into a more aggressive approach in share repurchase, is one that our Board frankly reviews on a regular basis quarterly, and it is based on the balance of our debt capital, as well as the ability of this business to generate free cash flow.

So to answer your question, the best way that I know how, Mark, is to tell you that just as I have mentioned before with respect to assets of this company, we take a broad approach and whatever vehicle seems to be best to return value to shareholders, is the vehicle that we are open and willing and ready to consider.

Beyond that, I wouldn't want to presume the decisions of our Board on that matter.

Okay, Thanks George.

Thank you we have a question from Mark Connelley with CSFB.

Go ahead please Sir.

Just one more thing George.

You talked about weather impact, but you didn't quantify it, but on a similar note, the energy impacted $0.04 seems a little on the high side.

Can you walk us through both of those?

Mark, this is Mat.

I guess regarding the energy impact, most of that has to do with our -- majority that has to do with our Neenah facility and the tie and cost of that mill to natural gas prices.

So, you know, essentially I'd say somewhere between 50 and 75% of that that impact was because of Neenah and natural gas.

We have also had some impact at Spring Grove when you net out between changes in coal prices and changes in oil prices as well as some negative effects from natural gas out in Germany.

So, I mean, that's -- I guess it is what it is.

That’s' what we have calculated.

So it looks like I underestimated Neenah then.

When you talk about the weather disruption, your loss to date, can you quantify that for us or…?

I mean, that has different tackles I guess in terms of how that impacts us.

But I guess one of the major components there was that we did have some impact on our ability to produce pulp in our pulp mill because chips were frozen and we couldn't get out them.

And as a result, we had to use more purchase pulp during some of that time period.

And we did around -- you know, made pulp and we quantify that to be about $0.5m impact.

Right, okay.

There are other pluses and -- other minuses involved there.

But that's probably the major one.

Okay thanks a lot Mat.

Mark, I guess the good news come out of that is that here in south-central Pennsylvania, we sure don't have a drought situation anymore.

Right.

Okay thank you.

Thank you and you have question from Mark Wilde with Deutsche Bank.

Go ahead sir.

Yes, just -- could we talk just briefly, Dante, about the pulp market because it just doesn't seem like there as much pricing power in the uncoated free sheet business.

You know, the pulp market is probably moved up $75-$100 you just -- you wonder whether that could be maintained, yet downstream -- the paper mills don't have much volume and certainly don't have any ability to pass along price increases.

Mark, it's a frustrating squeeze that we find ourselves in.

Our opinion is that this is short-term and that the pulp producers are being opportunistic based on a number of issues that have all come together at the same time whether it is inability to run logging operations at full capacity, to some capacity management on there, and they have got the leverage short-term.

But we don't see that continuing to the remainder of year.

I think this is the second quarter, you will see that leverage start to diminish and things find their way back into balance.

I'd be shocked to see pulp stay at $100 a ton, higher than we started the year for the remainder of the year without something else changing in the pricing side.

Are you sensing anything right now from any of the pulp producers, perhaps a little more of willingness to deal, anything that would tell you they are getting a little concern?

We have seen a little bit of that, but not as much as we'd like to see to be honest with you.

Okay, great.

And no other questions in queue at this time.

Okay if there is no other questions.

That will conclude our conference call today.

I'd like to thank you for your participation and you have a nice day.