Magnera Corp (MAGN) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Glatfelter second quarter earnings release conference call.

At this time, all participants are in a listen-only mode and the floor will be open for questions following the presentation.

It is my pleasure to turn the floor over to your host, Ms. Vickie Hoover, ma'am the floor is yours.

Good afternoon.

This is Vickie Hoover and I'm Executive Assistant for Glatfelter and I'd like to welcome you to today's conference call.

Joining us on the call today will be George Glatfelter, Chairman and Chief Executive Officer, John Van Roden, Senior Vice President and Chief Financial Officer, and Dante Parrini, Senior Vice President and General Manager; also in attendance is Matt Smith, Corporate Controller.

But before we begin our discussion 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 1995.

Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from expectations.

Now I'll turn the call over to Mr. Glatfelter.

Thank you, Vickie, good afternoon everyone and welcome to our 2003 second quarter conference call.

I thank you for participating in today's call.

I hope that you've had the opportunity to review the second quarter earnings release that was issued this morning.

After these brief introductory remarks John Van Roden will provide an overview of our financial performance during the second quarter and we will follow that by review of the operational side of the business by Dante Parrini.

I will then conclude with a few remarks before opening the call call for questions.

I guess I'd begin by saying that we're clearly and obviously disappointed with our overall financial results for the second quarter during what continues to be one of the most challenging economic environments in recent memory.

Our numbers are certainly not where we would expect them to be in more normalized conditions.

Although our highly specialized engineered products and long-fiber and overlay business performed quite well, we continued to face the challenges of softer industry wide demand particularly in our printing and converting business units.

In addition, higher pulp and energy costs relative to the second quarter of 2002 contributed to narrower margins.

These same factors are impacting most other companies within the global paper industry today.

For further discussion, I would now like to turn to John Van Roden to spend a few moments reviewing our financial results.

John?

Thank you, George.

For the second quarter of 2003, our earnings from continuing operations were $682,000, or 2 cents per share compared with $7.6 million or 17 cents per share in the second quarter of 2002.

Discontinued operations related to the sale of a nonstrategic facility in France.

The remainder of my comments will be for results from continuing operations.

Keep in mind that our planned second quarter maintenance outage has a negative impact of roughly eight to 10 cents per share for the second quarters of both 2003 and 2002.

The primary drivers of the decline in earnings for the second quarter of 2003, when compared to the second quarter last year, are as follows: Number 1, lower pension income equal to 6 cents per share, higher energy, pulp and waste paper costs equal to 3 cents per share and lower price, volume and market-related downtime mainly in printing and converting at 6 cents per share.

Net sales during the quarter, during the current quarter totaled $129.6 million compared to $136.7 million in the second quarter of 2002.

The decline in revenue was primarily due to the soft demand together with price competition in our printing and converting unit and as George said earlier, our highly specialized engineered products and long-fiber and overlay papers performed well in this difficult environment.

And lastly, we had significant cost reduction goals that we are achieving and Dante will touch on these in his comments.

Thanks, John, I'd like now to ask Dante to provide an overview of the operational side of our business, Dante?

Thank you, George, and good afternoon.

I'll provide comments on the performance of our three business units, our production facilities and other areas of interest for the second quarter of 2003.

First I'll start with our business units.

Printing and converting, this business unit produces premium quality fine papers for the book, publishing and envelope converting industries.

During the second quarter our net sales were 15% below target for the quarter and we were very disappointed with overall volume levels which fell short of target by 12%.

Our volume short fall for this business unit was primarily attributed to weaker than expected book publishing sales.

During the quarter, we saw an increased willingness of some customers to experiment with lower cost, lower quality products and we also lost some market share to competitors who undercut price.

In terms of near-term demand and pricing outlook, demand for printing and converting papers typically strengthens as we approach the fall.

With continued sluggish market conditions we expect demand for book papers to remain softer than normal in the near term.

We are taking actions to increase order activity for this business unit that includes more aggressively prospecting for new business, extending existing supply agreements and stepping up our new product development activities.

July shipments are back to planned levels, however, we still envision a challenging environment for the remainder of the quarter.

Our pricing outlook is questionable for this business unit.

With weak offset pricing, declining pulp prices and low demand, these all have us somewhat pessimistic on any near-term pricing improvement and may keep pricing depressed during the third quarter.

Let's go to engineered products.

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

Products include those such as ink jet papers, heat transfer papers, medical non wovens, playing cards and postage stamps, to name a few.

During the second quarter of 2003, net sales and volumes were 11% favorable versus target for the quarter, we continue to be pleased with the performance of this business unit.

Our backlogs are strong and we are actively working on a number of new product opportunities.

This continues to be a bright spot for our business.

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

The recently announced closures of a number of specialty mills has created opportunities for this business unit that we're actively pursuing.

Our pricing outlook is stable to slightly improving for select product lines within this business unit.

Now, let's talk about long-fiber and overlay papers.

This business is the world leader in the manufacturing of high-quality filter papers for the tea and coffee markets, overlay papers for the laminate industry, and various specialty niche products made from abaca fiber.

During the second quarter, we experienced slightly softer performance when compared to recent quarters within this business unit.

This soft performance can be attributed to the seasonal slowdown for tea bag paper which we typically see during the second and third quarters, a weaker mix in overlay papers, and the accelerated rebuild of PM9 in Gernsbach, Germany.

By mid August we expect to begin running this new piece of equipment making quality production in early September.

We are encouraged about the timing of the start-up of this machine relative to the typical seasonal pickup in the tea bag market.

Year to date performance for this business unit is in line with our expectations.

In terms of near-term demand and pricing outlook, demand for this business unit will be soft during the third quarter, again, attributed to the typical seasonal slowdown for tea bag paper, sluggish demand for overlay papers, which is more tied to the general economic conditions and the fact that our PM9 is down for a majority of the quarter being completing the rebuild.

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

A strong Euro does create downward pressure on pricing in nonEuro zone regions which has had some impact on our overlay regions during the second quarter.

Now I'd briefly like to review operations and supply chain.

During the second quarter our facilities continued to perform well as quality yields exceeded targets by approximately 1.5%.

Our production volume, however, was approximately 7% below plan and was primarily attributable to market-related downtime associated with weaker demand in printing and converting.

Costs control performance, especially in the areas of controllable items was in line with internal targets for the quarter, the drivers for unfavorable performance, as stated earlier, were higher than planned energy and fiber costs and market driven downtime.

In addition we have identified cost savings initiatives designed to take $13 million out of our 2003 operating plan.

Through the first six months, we are on track to achieve this objective.

This concludes my comments.

I'll now turn it back to you, George.

Thanks, Dante.

To sum it up, I would repeat, there's no joy around this table or within the organization on our second quarter performance.

We're very disappointed with the financial results as I'm sure our shareholders are as well.

This particular quarter, however, during which a major maintenance shutdown of the Spring Grove facility routinely occurs, is always a challenging quarter.

This year, these challenges were amplified by continuing weaknesses in our printing and converting business unit which today comprises roughly half of our total sales revenue.

We continue to battle the challenges presented by soft demand in this mature business, together with the cost-price squeeze on our margin and the negative impact on cash flow.

I think it's clear, as well, in our highly specialized business units, engineered products and long-fiber and overlay, we are seeing relatively strong performance.

As a niche player in these markets we're seeing increasingly greater opportunities for growth.

Our new product development efforts are producing attractive results which may not be readily apparent.

Today, approximately half of our revenue stream comes from new products, these are products that are less than five years old.

This performance reflects what I believe to be an emerging competency in this business.

A major component of our business strategy is to continue to aggressively drive new product development as an engine of future business growth as we pursue our vision of becoming the global supplier of choice in specialty papers and engineered products.

I believe that we've got some pretty exciting opportunities on the horizon.

I'm equally excited about the near-term start-up of the newly rebuilt paper machine in Gernsbach, Germany that Dante referred to.

This rebuild is ahead of schedule and it's on budget.

It features state-of-the-art proprietary technology that will significantly upgrade our capabilities in production of high-margin tea bag and overlay papers, markets of targeted growth within our business.

The fact is that we continue to participate in a challenging industry, that's influenced by macro economic factors that negatively affect our profitability.

In this regard, I would share that our focus is clear: Our short-term management priorities continue to stress the importance of increasing our cash flow and maintaining the strength of our financial position.

We have a number of initiatives underway in this area and I'm confident we're appropriately addressing these priorities.

As I mentioned in our press release, we're considering all appropriate actions necessary to further strengthen the financial position of the company, including reevaluation of our current dividend policy.

A word about capital spending.

As many of you who follow this company know, our cap ex is unusually high for 2003.

This is driven by two major projects.

First, a major environmental project at the Spring Grove facility, which is expected to come online in early 2004 and second, the machine rebuild in Germany to which I just referred.

Each of these projects is necessary to ensure the long-term strength of the business.

I will tell you that looking forward, cap ex for 2004 will be limited to levels below depreciation.

Furthermore it's our intent to control cap ex within the corporation to that level on a going-forward basis.

We're also continuing to evaluate appropriate opportunities to monetize the value of certain assets of the corporation.

Earlier in the year, we completed the sale of approximately 25,000 acres of timber land which generated in excess of $30 million in cash.

We believe that significant opportunity exists to extract value from our wood land assets without materially affecting our fiber supply costs.

We're actively engaged in this effort and will continue to pursue this kind of opportunity where it makes strategic sense.

In addition, to these initiatives, we continue to actively address our environmental concerns.

In this regard, we're continuing our discussions to reach a potential settlement on the Fox River matter.

We were particularly encouraged by a recent Wisconsin Supreme Court decision that was favorable to holders of insurance policies regarding environmental remediation costs.

In summary, there's no question that like virtually everyone else in this industry today, we've got a lot of challenges to contend with.

We have a clear view of what they are and we have plans to deal with them.

I believe we also have some compelling opportunities that are beginning to take shape and I'm confident we have in place the commitment of a highly talented management team to execute our business strategy.

I thank you for your attention and participation in this call at this point, I'd like to open the call for your questions.

Thank you.

The floor is now open for questions.

If you do have a question, you may press one followed by four on your touch-tone telephone at this time.

If at any point your question has been answered you may remove yourself from the queue by pressing the pound key.

We do ask if you are using a speaker phone to please pick up the hand set to provide optimum sound quality.

Once again, that is one followed by four on your touch-tone telephone at this time.

Please hold while we poll for questions.

Your first question is coming from Mark Wilde of Deutsche Banc.

Please state your question.

Good morning.

I have a number of questions.

I wondered if we could maybe start out by talking about how much market downtime you took in the printing and converting business in addition to the maintenance outage?

Thank you, Mark.

I'll turn that over to Dante for that answer.

Mark, during the second quarter, between Spring Grove and Neenah, Wisconsin we took a couple of weeks worth of downtime across the business unit.

Two weeks of market downtime in addition to --

the maintenance outage.

All right.

So, that would probably be like 5,000 tons up at Neenah and five or six, and something about 2.5 times that at Spring Grove?

That's a close approximation.

Do you have the exact number, Dante?

I would say that it's probably a little bit north of what you stated for Neenah and your Spring Grove number is pretty close to being accurate.

Okay.

All right.

The drop in the volumes in this business really played large.

Do you have any sense of what's -- how much of a hit you might have taken in terms of your market share in the book paper business?

I think you've been running about 40%.

The number that you state is on the uncoated book publishing side.

Yeah, right.

We also track Euro share in terms of total book publishing.

Okay.

If I were to look at the second quarter, we probably lost three to four points of share and this is based on AS&P data, which is why I'm saying probably, I must qualify anything that I quote because we don't have control over the accuracy of AS&P data so we tend to look at that more from a directional point of view than a highly precise point of view.

And as I stated in my comments, that really was a combination of a couple of cases where we saw publishing customers being attempted to experiment with some low-quality, low-cost alternatives due to the financial pressure that they find themselves under, as well as a couple of competitors being very aggressive and, from our perspective, buying some business on the short term.

All right.

Dante, just to kind of follow that out just a little bit further, does that suggest anything about, you know, what the -- all the work on the e-business approach had done because I thought what that was attempting to do was build better links with the customers and create a little stickier customer base?

Correct.

I don't necessarily see this as a long-term trend and only time will tell.

I view this more as a short-term issue that because of the poor economic conditions, not only the paper industry but many of our customers are having very difficult times and they're being persuaded to drive more risk into their business on the short term until they see some type of turnaround.

So earlier in the year, quite honestly, Mark, when the first offset price increase was announced in the March time frame, as you might know we try to take a price leadership position and we did walk away from some business based on our perspective of backlogs and where the market was.

And as time has played out, we obviously saw that the offset price increase didn't stick and demand weakened as opposed to strengthened.

So I see that as partially attributing to the short fall during the first half the year.

Okay.

Dante, if that's the case, is it unlikely, then, that you would have a rationalize some of the smaller machines either in Pennsylvania or Wisconsin or is that still possible?

Well, a couple more comments on the drivers behind volume variance and especially as you look at some of the lower-quality, lower-priced options.

The pricing differential over the last 10 years, say between ground wood and free sheet is the highest it's been in a decade and you'd have to go back to 1996 to find a differential close to that and in recent years, as early as '91 and going into '92, we saw ground wood prices going higher than free sheets.

I see some temporary things lining up that created temptation for customers to experiment with these lower quality alternatives.

It's also our opinion that customers aren't going to be happy with the quality of the product either from an editorial perspective or an end use customer.

Getting back to the question about rationalizing capacity, one of the things that we consistently do is assess the performance of our assets, especially those that are marginal.

And we're actively engaged in measuring anticipated future demand with our capacity.

On the short term, as you saw in the first first half of the year, we did take some weekend downtime with the small machines in Spring Grove and took some of the larger equipment down when the supply and demand didn't line up.

Okay.

Do you have any estimate on the market downtime about how much you think that cost you?

Yeah, we were -- this is John, Mark.

If you recall from my comments, I said that the lower price volume and market-related downtime mainly in printing and converting was about 6 cents a share.

I'd say that about a third, a third of that for each of those things.

So the nonmarket-related downtime is slightly under 2 cents a share.

Okay.

What did Gernsbach cost, do you have any sense of that and what is that going to cost quarter to quarter if that machine is going to be down most of the third quarter?

Our -- by taking the -- accelerating the PM9 rebuild, had that machine coming off-line about six weeks earlier than our internal plan and we estimate that at about -- at an operating income point of view about 800,000 Euro or a million dollars.

So, on the other side, we're going to bring it up six weeks earlier than planned and the good news about that is as you might recall, especially for our tea bag business, the fourth and first quarters of the year are our busy season because we approach the colder weather in the western hemisphere.

So we see an opportunity to make that up in Q4 and Q1 of next year.

Okay.

And I guess just to -- and then I'll hop off here, but I am just trying to understand the impact of that on second quarter versus first quarter and then kind of third quarter versus second quarter.

So is it a million dollar negative second quarter versus first quarter, or a million dollar negative just second quarter versus what you thought it might do the second quarter?

It's the latter.

Second quarter versus what we had planned.

Okay.

Do you have any idea, Dante, second quarter versus first what it did?

Not off the top of my head, Mark.

Okay.

Will it be a bigger negative in the third quarter than it was in the second quarter?

I don't know if it will be bigger net-net because as we end the third quarter, we will start seeing some of the demand for our products picking back up.

So, if I were to speak in more general terms, I would envision the second quarter and third quarter more closely mirroring each other.

All right, thanks, I'll pass it on to the next questioner.

Thank you.

Your next question is coming from Robert Carl of the Carl Group.

Please state your question.

I wonder if we could comment on cash balances and cash flows for the quarter?

Yes.

This is John.

And debt equity ratios, John?

Yeah.

The debt-to-equity ratio is about 36% debt to total capital which is right where it was at the end of the first quarter.

The cash flow was and the cash balances net-net debt and so forth is basically unchanged from the end of the first quarter to the end of the second quarter.

Okay.

Could you comment on operating cash flows for the quarter, funds provided by operating activities?

Hello?

Bob, we don't have the cash flow statements out yet, I think it would be -- in that we haven't disclosed them for all people, I think we'll wait until we print them for everybody.

Okay.

I'll wait for the Q. That's all.

Thank you.

Once again, if you do have a question you may press one followed by four on your touch-tone telephone at this time.

Please hold while we poll for questions.

There are no further questions at this time.

I would like to turn the floor back to Vickie Hoover.

Okay.

Thank you, Jackie.

This concludes today's conference call.

We thank you for your participation.

Thank you and good-bye.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.