Magnera Corp (MAGN) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Glatfelter's earnings release conference call. (OPERATOR INSTRUCTIONS).

It is now my pleasure to introduce your host, Vickie Hoover.

Ma'am, you may begin.

Thank you, Elsa.

Good afternoon.

I'm Vickie Hoover, 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 attending is Matt Smith, Vice President, Corporate Planning and Treasurer, and John Chekunsky (ph), our new Vice President and Corporate Controller.

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.

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.

Thanks, Vickie.

Good afternoon, everyone, and welcome to our 2003 third-quarter conference call.

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

After my brief introductory remarks, John will provide an overview of our financial performance during the quarter followed by a review of the operational side of the business by Dante, our standard reporting format.

I will then conclude with a few marks before opening the call for any questions you might have.

To begin, I guess my comments would reflect that the results for the third quarter demonstrate our commitment to make some pretty tough decisions that reflect the reality of the business environment that we're facing.

We've taken significant actions to reallocate our resources and eliminate excess capacity.

We're also aggressively attacking our potential exposure with regard to our former Ecusta Division.

Although the need for a reserve for Ecusta is disappointing, I believe the clarity provided by the recent Ecusta developments coupled with our successful negotiation of a significant portion of the Fox River matter in Wisconsin, is really important for our shareholders to understand, and allows us to focus our energy on executing our core business strategy.

Excluding non-recurring charges, our operational earnings, although not where we would like them to be, are in line with our expectations for the quarter.

By way of a high-level overview, the printing and converting business within this Company continued to experience weak demand and severe pricing pressure.

However, we're especially pleased with the progress of our highly specialized Long-Fiber and Overlay and Engineered Products business units.

Despite a difficult global economic climate, our Engineered Products business unit reported double-digit topline growth during the quarter.

And the Long-Fiber and Overlay papers business unit saw revenue growth as well.

With that as a backdrop, I will now ask John Van Roden to spend a few moments reviewing our financial results.

Thank you, George.

For the third quarter of 2003, our earnings from continuing operations, excluding charges, were 3.7 million, or 8 cents per share compared to $11 million or 25 cents per share in the third quarter of 2002.

Operating results for the third quarter of 2002 include charges of approximately 10.3 million after-tax or 23 cents per share.

These charges reflect pretax costs of $2.1 million related to the previously announced changes at our Neenah, Wisconsin facility, reserves for expected costs to address uncertainties related to the former Ecusta Division of $11.5 million pretax.

The buyers of Ecusta have not honored their obligation under the acquisition agreement.

Therefore, we believe it is prudent to reserve for receivables owed by the buyers, as well as for contingent environmental liabilities associated with Ecusta -- and costs totaling $2.7 million pretax, related to inventory write-downs at the spring Grove facility and asset write-downs at the Gernsbach facility.

Overall, the primary drivers of the decline in earnings for the third quarter of 2003 when compared to the third quarter last year are as follows -- lower pension income of 6 cents per share, higher energy, pulp and wastepaper costs of 3 cents per share, lower price in volume mainly in printing and converting of 9 cents per share.

Partially offsetting these factors is the favorable effect of foreign currency of 2 cents per share.

And lastly, we previously announced in September a series of actions to reduce our costs and focus our resources and investments on specialty product niches with higher growth potential and returns.

These actions will not only enhance our earnings, but are expected to improve the Company's credit profile.

Thanks, John.

I'd now like for Dante to provide an overview of the operational side of our business.

Dante.

Thank you, George, and good afternoon.

You'll have to bear with me.

I'm fighting a bit of a cold.

But what I would like to do now is provide some comments on the performance of our three business units during the third quarter of '03.

First, we'll start with printing and converting.

As you might recall, this business unit produces premium quality fine papers for the book publishing and envelope converting industries.

And as George stated earlier, the third quarter performance was disappointing.

Our net sales were below our target for the third quarter and 13 percent below the third quarter of last year.

Volumes were also off 10 percent versus the same quarter last year.

The weakness was primarily due to a shortfall in book publishing sales and continued price pressure across most of our product categories.

A bright spot is that we continue to be viewed as a supplier of choice by many publishers, as witnessed by the significant number of best-sellers that have been printed on Glatfelter paper this year.

John stated the issues around addressing our cost structure and fitting our capacity with expected demand.

As you know, we announced plans in September to permanently shut down certain equipment and processes at our Neenah, Wisconsin facility.

This actually cut Neenah's capacity by approximately 25 percent.

Outside of the obvious benefits of reducing our costs and capacity, there are some benefits that we see going forward, that it allows us to focus on better serving customers in our target markets.

It allows more flexibility between our North American mills to optimize mix, and allows the ability to offer broader variety of fiber services to our customers.

This has been a very difficult and challenging environment for Neenah facility.

We're very pleased with the overall cooperation and professionalism of all of our employees there.

I'm glad to report that there has been no decrease in plant productivity at all.

In terms of near-term demand, outlook for pricing and product demand, we see continued weakness in demand for printing and converting grades.

And the pricing outlook continues to be questionable for this business unit.

The combination of weak offset pricing and low demand has us pessimistic on any near-term pricing improvements.

This will most likely keep pricing depressed during the fourth quarter and perhaps carrying over into Q1 of '04.

Now let's shift to engineered products.

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

Some of the products include things such as inkjet papers, heat-transfer paper, medical nonwovens, playing cards, and postage stamps to name a few.

This business unit posted excellent performance in the third quarter.

Our net sales were up approximately 14 percent and volumes were 18 percent favorable versus target for the quarter.

The consistently good performance from this business unit is driven by the following -- more fully utilizing our specialty cutter (ph) capacity in Spring Grove; our metallized products business performance was exceptionally strong in the third quarter.

Some of that is a benefit from the strong euro, but it is just outright growth in this particular market segment.

And growth in our digital imaging and industrial specialties market segments, we've had a concerted effort on those two particular product categories, and we have been very successful in growing our share there.

This growth comes really from a combination of expanding our product offering to existing markets and existing customers as well as expanding geographically.

Near-term demand and pricing outlook for the engineered products business unit is pretty favorable on the pricing side.

We see things very stable at this stage of the game.

And we may experience some softening in our backlogs during the fourth quarter, which is typical, as many of our customers look to reduce year-end inventory levels.

Now shifting gears to Long-Fiber and Overlay papers, where we are the world leader in the manufacture of high-quality filter papers, for the tea and coffee markets, overlay papers for the composite laminate industry, and various specialty niche products made from abacka (ph) fibers as well as many other fiber substrates.

The third-quarter performance is slightly ahead of target.

We did have a positive foreign currency effect for this business unit as well.

We also had quarter-over-quarter and year-over-year growth in volumes.

We did have slightly unfavorable product mix in overlay papers.

We have spoken over previous quarters about -- to grow our technical specialties market segment.

We recently hired a new general sales manager to lead the development of this particular part of our business.

He is a very experienced executive with extensive industry experience in specialty papers and nonwovens.

So we are very excited at the prospects for this particular part of our business.

During the quarter, our tea bag paper volume was down slightly, and that is primarily attributed to the very warm winter and early fall weather we had.

We're very excited about the rebuild of the paper machine No. 9 in Gernsbach, Germany.

It started up ahead of schedule.

We are on budget.

And in the short term, we obviously have less production capacity related to the downtime associated with the machine startup, and qualification of new grades on the new paper machine.

However, our learning curve is trending very favorably, and we've already experienced some of the benefits of this new outset.

So year-to-date performance for this business unit is slightly below expectations, driven largely by the downtime associated with the PM 9 (ph) rebuild, and the price mix performance within the overlay business.

In terms of near-term demand and pricing outlook, demand for tea bag papers has picked up as we approach our busy season.

We get into the cooler late fall and winter weather.

We're very encouraged by our new product development efforts.

In Europe, our trials are going very well across all three market segments within this business unit.

And the near-term outlook for pricing in this business unit is relatively stable with some pockets of modest price pressure associated with currency and local economies.

I would like to make just a couple of quick comments on new product development, and then turn it back to George.

September was a record month for Glatfelter in new product development revenue.

And it was the highest month ever for what we call our innovation category. which would be products that are new to the world and nee to the company.

We have invested an awful lot of time and energy in resources in the last couple of years in improving and increasing our new product development and productivity.

And we're very pleased to see this performance.

The new products continue to be very strong and equal approximately 50 percent of our total corporate revenue.

That is it for now.

I will turn back to George.

Thanks, Dante, and glad you made it through.

To summarize, this obviously has been a very, very busy quarter for Glatfelter.

Our actions in the quarter indicate that we are proactively tackling the difficult issues in our business.

Although business conditions aren't favorable and we're not satisfied with our performance, I believe our actions demonstrate our commitment to pursue our vision of becoming a global supplier of choice in specialty papers and engineered products.

We're making progress towards that vision.

Sometimes that may be difficult for outsiders to understand.

Our highly specialized business units and engineered products and Long-Fiber and Overlay are performing relatively well.

And as Dante indicated, we are seeing increasingly greater opportunities for growth, both with existing and new customers, and interestingly, as well as existing and new geographies.

I am very excited about our new product development efforts.

September wasn't only a record month for our company in new product, it was also a record month in the category that we call innovation, in the area of new products -- products that are not only new to Glatfelter, but they are new to the world.

Today, approximately half of the engineered products revenue comes from new products that are less than five years old.

And I think that is the best marker of progress towards the vision that I can offer you today.

It reflects an emerging competency in the business, a competency that frankly had not existed two to three years ago.

We intend to aggressively drive new product development as an engine of our future business growth.

I'm equally excited about the results we're seeing from the newly rebuilt paper machine in Germany.

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

Our investments in projects such as this machine and in new product development are necessary to ensure the long-term strength of the business.

With the completion of the machine rebuild, as well as the near-term completion of a major environmental improvement project in our Spring Grove, Pennsylvania facility, we are well positioned to capitalize on business opportunities as they present themselves in the future.

Additionally, starting in 2004, our annual capital budget will revert to levels below depreciation in a manner consistent with our intention to improve cash flow and strengthen the balance sheet.

Our Company's actions of reallocating resources and permanently shutting down certain equipment and processes in our Neenah facility will improve the long-term strength of the business by not only reducing our cost structure, and by increasing our emphasis in growing higher value-added specialties products.

Be that as it may, we continue to participate in a challenging industry that is influenced by macroeconomic factors that negatively affect our profitability.

In this regard, our focus is clear.

We have shared it with you in the past.

Our short-term management priorities continue to stress the importance of increasing our cash flow and maintaining the strength of our financial position.

During the third quarter, we adopted a financial policy that supports our vision and reflects our long-term view of the business.

We revaluated our dividend policy, and reduced our quarterly dividend from 17.5 cents per share to 9 cents per share.

The new dividend level strengthens our balance sheet and is consistent with the Company's cash flow profile.

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

During the third quarter, we reached an agreement with the Wisconsin Department of Natural Resources and the EPA to remediate TCB contaminated settlements in Little Lake Butte de Morts in Wisconsin.

The agreement calls for Glatfelter and Wisconsin tissue mills to each deposit $25 million into an escrow account that will be used to fund the cleanup.

Through collective efforts, we can move forward in creating a better environment for our communities in the Fox River Valley.

This development allows us to clarify our exposure, and move forward to focus on our core business strategy.

Additionally, we are particularly encouraged by a recent Wisconsin Supreme Court ruling that was favorable to holders of insurance policies regarding environmental remediation costs.

Finally, we are also continuing to evaluate appropriate opportunities to monetize the value of our woodlands.

Earlier in the year, we completed the sale of approximately 25,000 acres of timberland, which you may recall generated in excess of $30 million in cash.

Recently, we entered into a similar agreement to sell about 1200 acres of woodlands in Delaware to Sussex County for $17.1 million.

We expect that transaction to close in the first quarter of 2004.

We continue to believe that significant additional opportunity exists to extract value from our woodlands asset 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 sense.

In summary, I guess there's no question that we have a lot of challenges to contend with.

It is also clear that we have some compelling opportunities that are beginning to take shape.

I am confident we have in place the commitment of a highly talented management team to execute our business strategy and that we can capitalize on these opportunities as they develop.

At this point, I would like to open the call up for questions.

I will turn it back to you, Vickie.

Now we will turn the call back to the operator, who will give you instructions for the question-and-answer period.

(OPERATOR INSTRUCTIONS).

Mark Connelly of Credit Suisse First Boston.

Thank you.

Several questions.

First, can you explain a little more about how the Neenah situation enhances fiber flexibility?

Give a little more color on what is actually happening there?

Sure, Mark.

This is Dante.

As you might recall, the Neenah mill has been running with a de-ink pulp mill, so we are buying wastepaper, de-inking it and turning that into pulp and making product.

As we shut down the de-ink pulp mill, we will now buy market pulp, and have access to a much wider variety of fiber sources, that enable us to make a wider variety of grades; it will also create greater transparency between the grades of paper in Spring Grove and the grades of paper made in Wisconsin.

Okay.

A couple of other questions.

Can you tell us where exactly in the start-up curve you are -- maybe not exactly -- on the paper machine in Germany?

We started up on August 18.

Then within the period of two weeks, we went from stock on the wire to making quality paper.

We have already produced well over 250 tons of quality paper.

We have some grades already qualified and being sold as commercially viable.

We have other grades that we're working on getting qualified with customers.

And we have a number of new products being developed on the machine as we speak now.

Okay.

In terms -- what would your expectations have been for where you would be right now?

Are you ahead of schedule?

We're ahead of schedule.

I think anybody associated with the start up of a new paper machine, especially one that is more sophisticated than perhaps standard fordineered (ph) type machine where we have got inclide (ph) wire and other proprietary hardware built into the asset, for us to be able to get to a point where we are making quality paper within two weeks is outstanding.

Do you think that the market for that machine is going to be there as fast as you're going to get there?

Are your sales and marketing efforts where they need to be to take advantage of a machine that's coming up fast?

Yes.

I think there are a few facets to the answer to this question.

One is, as we look at more effectively utilizing the entire set of assets we have in Europe, we are moving a number of products from machines in Germany and France and putting them on the machines that we think are a best fit, in terms of cost structure and quality.

Secondly, we mentioned the addition of some talent on the business development and R&D side to help us develop new technical specialty products; so that was part of our business plan.

And the early indications of that -- the group of people that we have working on a very focused list of priority projects are making very good progress now.

So, I believe through the course of 2004, that we will continue to go through our ramp-up and our learning curve, but it will move exponentially fast, and that we will be able to fully utilize all of the assets and all of our capacity through the course of 2004.

That is what we're planning.

Okay, thanks, Dante.

Just a couple of financial questions.

I wonder if John could quantify the annualized impact of the accelerated depreciation; is it a meaningful number or not?

Yes, for the onetime charge -- let me take you back to the charge we made in relation to Neenah.

We had announced that the charge would be in the neighborhood of 20 to 28 million, for the overall Neenah change.

We're still in that range; although, I am happy to say it will probably be in the lower end of that range.

Part of that was accelerated depreciation, which will take place -- most of it, in the fourth quarter of this year.

So that is a significant part of that charge, which will take place in the fourth quarter.

The annual benefit from that, Matt, can you give a shot at that?

Yes.

I'm not totally clear on that, Mark.

You're asking for what the savings and depreciation will be next year because of the fact that we would have0 accelerated depreciation this year?

Yes, just ballpark, if it's meaningful or not.

I would say somewhere between a half a million and $1 million.

Okay, fair enough.

I wonder if you could tell us what energy costs did third quarter versus second?

Energy costs in the third quarter were 3 cents higher than our expectations or than our budget -- excuse me and wastepaper in total were 3 cents higher, which is the same amount that they were higher in the second quarter.

Now, yes, second quarter and also versus last year.

The portion of energy out of that --

I think Mark, it's lower than what we had experienced in the second quarter overall.

I don't have an earnings per share estimate on that; but perhaps a penny or so.

Okay, fair enough.

And just one last as question.

You talked about CapEx going back down below depreciation.

Are there any meaningful spending projects that go into that number?

Mark, perhaps I can give you an answer.

The way we have approached our CapEx for '04 is, obviously, we take a look at the categories of safety, compliance, and then what type of standard maintenance and repair work has to get done.

There is some growth capital built into our CapEx plan for next year.

But we set very aggressive targets in terms of not to exceed numbers that are going to be below our levels of depreciation.

So it has forced us to adopt only the most strategically important or highest returning growth investments available.

But our total CapEx number is going to be significantly lower they what you have seen over the last three years.

Okay.

And yet, that still will include some discretionary spending?

Correct.

Okay, perfect.

Thank you.

Our next question is coming from Mark Wilder of Deutsche Bank.

Good morning, or good afternoon.

I wondered if you could give us a little more color first on the Ecusta situation.

Well Mark, this is George.

I think that has been a situation that has been incredibly dynamic over the past several months.

If you go back to our Q in the second quarter, I think you saw that we noticed that we had some potential exposure environmentally, and that we might have had some commercial exposure as well, depended upon the buyer coming forward with payment for liabilities for which the company was indemnified under the sales agreement.

As that whole process has evolved, we really have received greater clarity on the scope of the environmental liabilities.

I think we have a reasonable degree of comfort, in that we understand what that liability is likely to be.

It is also true that we have not yet received reimbursement for some of the liabilities that are owed to us.

And we just felt frankly that it was prudent, with all that as a backdrop, to establish the charge.

Okay.

On the Fox River, what are the remaining issues that you may be liable for up there?

This one case does not solve everything for you up there; is that correct?

Well, I think that is a blanket statement, Mark.

And in that regard, it is accurate.

I do believe that the resolution really resolves all of the exposure that we believe to be financially material.

There may be some residual exposure at different parts of the river.

But we believe that we are sufficiently accrued for that under the original accrual.

And we don't anticipate that number to grow significantly.

And you said that you had had some encouraging news on a Supreme Court decision up in Wisconsin on maybe recapturing some of this through insurance?

Is that right?

That's correct.

Can you give us a little color there?

There's not much that I can say beyond the Supreme Court decision.

I will tell you that we have been in contact with the agencies who have provided coverage in the past.

We are actively engaged in negotiations with those agencies.

Beyond that, I can't comment except to say that we are hopeful of having some material level of payment, with respect to the remediation costs.

Okay.

And then I wanted to switch over and just talk a little bit about the printing and writing or printing and book paper number.

I think I heard Dante say the volume was down 10 percent year-on-year there?

Yes.

Dante, is that more in the book paper market?

Or is that in some of the filler tonnage that you guys run that is probably pretty low right now in terms of price levels?

I would say that it is a combination, Mark.

But a good of that number is the traditional, educational publishing, legal reference grades that we produce.

And I think the last conference call, we covered some of the reasons why we saw a show-term drop in demand for the product.

One is that overall demand in this market space from our perspective is weaker than normal.

We are seeing a less than stellar fall trade season.

And then we had the issues that we talked about earlier in the year of losing some share, that in a sloppy business environment, is difficult to recapture quickly.

So those are all mitigates.

Okay.

All right.

So just to refresh, that stuff that you talked about was really some of the uncoated groundwood (ph) guys coming into the trade book market?

Is that correct?

We've seen a small amount of that.

But we've also seen some fringe commodity producers also looking for some places to put some tons where they typically don't compete.

And to be quite honest with you, that has been more damaging to the market than a selection of -- a title here or a title there on groundwood paper.

Okay.

George, on that land sale down in Sussex County, did you say it was $17 million -- the number?

Mark, I said 17.1.

But you're correct.

And that was on 1200 acres?

That's correct.

Could you explain that?

It sounds like an enormous per acre value for timberland.

That is a acreage that obviously is pretty desirable.

It is located in the area surrounding Rehoboth Beach, which is a resort community.

Actually, the state of Delaware, as part of a land-preservation movement, that had been started, I believe, in the current administration, has been very interested in preserving this forestland for conservation purposes in the future.

So, we are very encouraged by that sale.

We believe we have the opportunity for additional sales in that part of the state.

And as I mentioned earlier, we're pursuing, pretty aggressively, monetization of our woodland assets where it makes sense.

And many of these assets happen to be located in pretty interesting areas.

Yes, is that -- did you say the sale has closed?

Or will it close in the fourth quarter?

It will close, I believe, in the first quarter.

In January.

January of '04.

All right.

Will you be using any kind of a tax-deferred structure here?

Not the same one we use on our last sale, although we're working on various tax efficiencies to try to minimize the tax on that sale.

Do you have any ballpark, John, on how much cash you may actually bring home from this sale?

No, I don't yet.

Sorry.

Okay.

I think that covers it for me.

(OPERATOR INSTRUCTIONS).

We have a follow-up coming from Mark Wilder of Deutsche Bank.

Please go ahead.

As long as there's nobody else out there right now, I wondered if Dante could talk a little bit about what happened -- at what point the appreciating Euro really starts to create some significant headwind over at Gernsbach?

Well, we've talked about the natural hedge we have built into the business on previous conference calls.

And I think you had asked us what does a 120 or a 130 Euro mean to the business.

From a playing point of view, we still think somewhere around 115 on average in the near-term is probably relatively accurate.

There's a little bit of positive fall-through to the bottom line.

John referenced I think it was 2 cents this year -- third quarter versus last year third quarter.

So, I think that is as best of an estimate as we could give you.

I was more thinking, Dante, just about your ability to sort of compete from that mill into other markets.

Most of the sales in Europe, so it's less of an issue?

We do have a majority of the LNOP (ph) revenue coming from the Euro's own countries.

However, we do have still a relatively significant amount of business that's transacted in U.S. dollars are other currencies.

And that's where us competing against players to operate in Pounds, Sterling and U.S. dollars makes the strong Euro a bit of a challenge for us, competitively speaking.

Again, I think if you look at where you are on the continuum of specialized products versus commodity products, there's a little bit of insulation, not complete insulation.

I would be misrepresenting the issues if I told you we didn't have some price pressure in certain regions of the world on certain categories of products because of the strong Euro.

That is an issue that we manage very actively.

But I think if performance of the Long-Fiber and Overlay business unit, all things considered, that business unit is still producing quite well for us.

And you mentioned that the volume was up pretty nicely in engineered.

I just wondered where that G-cutter (ph) is in terms of being filled out at this point?

Yes, we call it the specialty cutter because we do a lot more than gravier (ph) coat.

But, that asset is running, in some cases, seven days, three shifts a week.

We had planned to run about five-and-a-half days a week through the course of the year.

We have slightly exceeded that plan.

We had maybe 11 weekend days down on the S-cutter through the third quarter; that was it.

So we're ahead of plan on that particular asset.

And we attribute that to growth in the digital imaging and industrial specialty segments.

I can remember just a couple of years ago that was really -- had been a disappointment in terms of your inability to fill that.

So it sounds like that has been a pretty nice turnaround.

Correct.

Over the last couple or three years, there have been a lot of people working very hard to get better utilization out of that asset.

So we're very pleased with the performance there.

Okay.

Good.

That is it for me.

There appear to be no further questions at this time.

I'll turn the floor back over to Vickie Hoover for any final remarks.

If there are no further questions, this'll conclude today's conference call.

And we thank you for your participation.

Good bye.

Thank you, this does concludes today's teleconference.

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