Magnera Corp (MAGN) 2004 Q2 法說會逐字稿

Good morning ladies and gentleman and welcome to the Glatfelter second quarter earnings release conference call. [OPERATOR INSTRUCTIONS].

It is now my pleasure to turn the floor over to our host Mr. Glen Davies (ph).

Sir, the floor is yours.

Thank you Anthony, very good morning, this is Glen Davies of Glatfelter's Corporate Finance group.

I like to welcome you to our second quarter conference call.

On the call this morning is George Glatfelter, our Chairman and Chief Executive Officer, John Van Roden, Senior Vice President and Chief Financial Officer and Dante Parrini, our Senior Vice President and General Manager.

Also in attendance is John Jacunski, our Vice President and Corporate Controller.

Before we begin our discussion, I would like to remind you that any statements made today with regards to our future expectations may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

Please refer to our 2003 annual report filed with the SEC for important factors which, among others, could cause the companies actual results to differ, from any results which might be projected, forecasted or estimated in any such forward-looking statements.

And with that I will now turn the call over to George.

Thank you Glen, good morning and welcome everyone to our 2004 second quarter conference call.

I hope you had an opportunity to review our earnings release that was issued this morning.

After my introductory remarks, John Van Roden will provide an overview of our financial performance during the second quarter followed by comments from Dante on the operational side of the business.

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

The second quarter 2004 was a very active period for Glatfelter as we continued to pursue our vision of becoming the global supplier of choice in specialty papers and engineered products.

Our second quarter results compared to a year ago largely reflect the impact of lower selling prices in 2004 compared to the same quarter of 2003.

As you know throughout the past few years our industry has experienced a period of declining selling prices.

However it is clear to me now that this trend is changing.

During the second quarter, we experienced strengthening backlogs.

This improvement in demand has led to price increases in different areas of our business, most notably in our printing and converting business unit, which currently comprises about 46% of our sales revenue.

In many cases due to quarterly price protection these increases were not realized until July.

In fact as many of you who have been following Glatfelter for some time understand, pricing across our portfolio of specialized businesses usually lags improvements in commodity pricing by about one to two quarters.

We expect additional pricing improvements during the third quarter and we also continue to see strong demand across many of our product offerings.

Although these are all positive developments we remain committed to our strategies to reposition our product portfolio and drive cost from our business.

Last quarter, I discussed our North American restructuring program that was designed to achieve these objectives.

Later in the call I will provide a brief update on the status of this program for you, but first I would like to ask John to present a review of the second quarter's financial results.

John?

Thank you George.

As you can see in our second quarter release we reported a loss from continuing operations of $1.6 millions or $0.04 per diluted share, compared to income on the same quarter a year ago of $682,000 or $0.02 per share.

The primary driver of our lower results compared to last year's second quarter was lower product pricing, primarily in our printing and converting business unit, which cost us $0.07 per share when compared to 2003.

We believe this trend of lower prices when compared to 2003 began to reverse in the first quarter of this year and we expect additional increases as we move forward and further into 2004.

To underscore that change in trend, the second quarter gross profit -- when you remove the cost of the June shutdown -- would have been over 5% higher then the first quarter gross profit of this year.

Also June marked the first month of the year that our earnings exceeded plan.

At our Neenah facility, higher purchased fiber and energy costs together with transitional related operating inefficiencies have delayed the achievement of our projected benefits.

We believe that the operating inefficiencies have been largely resolved and we expect that the benefits of the Neenah restructuring will be more fully reflected in the operating results of the facility when the remaining transition related issues are resolved and when fiber and energy costs return to more normalized levels.

As mentioned, in our earnings release, we expect to record a charge of approximately $9 to $20 million in the third quarter of 2004 associated with the new labor contract covering the Spring Grove facility.

The charge is primarily for pension and other related benefits and severance costs.

A substantial portion of the charge relates to enhanced pension benefits and relating costs that are non-cash to the company, as they will be paid for from our over-funded pension plan.

As you know, it is our goal to maintain a solid balance sheet.

Despite paying $15 million into the escrow fund required for the Fox River Consent Decree in the second quarter, we ended the quarter with debt of approximately $206 million, compared to $199 million at the end of the first quarter, and substantially below year-end 2003 debt levels.

Also, we continue to pursue additional opportunities to extract value from HBU Timberlands as well as our endeavor to recover additional insurance proceeds related to environmental issues.

This concludes my comments, and I thank you and I'll turn it back to George.

Thanks John.

I would now like to ask Dante to provide an overview of the operation side of the business.

Dante.

Thank you George and good morning.

I will provide some comments on the performance of our three business units and a few other areas of interest for the second quarter of 2004.

First we will start with printing and converting.

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

For the second quarter, net sales were 15% below the second quarter of 2003 and volumes were down 10% in the comparison.

Each of these reflects the impact of shutting down capacity in our Neenah, Wisconsin facility in the fourth quarter of 2003 as well as weaker average selling price.

Over on a more positive note, the trajectory of this business has changed for the better.

As you heard earlier, backlogs are strong, prices are increasing and we are beginning to recover our book publishing market share lost in 2003.

In the second quarter we introduced Performance Plus, which is a new product and service program designed to meet the unique needs of the book publishing industry.

Performance Plus focuses on improving the ease of ordering, reducing cycle times while providing best in class quality to our customers.

We believe Performance Plus will further strengthen our leadership position in our largest market segment.

Few comments on near-term demand and pricing.

Demand is strong in North America and we expect this trend to continue and our pricing outlook is positive.

We have implemented a second price increase for our envelope papers during the second quarter that will favorably impact the third quarter and the remainder of the year.

We have also implemented a price increase for trade book paper that was fully realized on July 1st.

Moving on to Engineered Products, which produces customized solutions for the digital imaging, casting and specialty release, pressure sensitive and industrial specialty markets.

Some products that you may be more familiar with would include things such as inkjet papers, medical non-wovens, heat transfer papers, playing cards and postage stamps to name a few.

Net sales for the second quarter were approximately up 2% and volumes were favorable by approximately 8% versus the same quarter a year ago.

This continued growth was largely driven by increased sales of uncoated specialties across a number of our market segments, strong volume in the digital imaging inkjet product area, as well as our success in securing several new pieces of business in our casting and specialty release paper segment.

This further supports the fact that our new product development process continues to work well at quickly bringing products to market and as stated before customers continue to approach Glatfelter to be their supplier of choice in these specialty segment markets as smaller non-immigrated mills continue to experience difficulties.

In terms of near-term demand and pricing, our near-term demand is strong for this business unit and we have successfully implemented some select price increases in a few of our market segments which will have a positive impact on the remainder of the year.

Now I would like to move to Long Fiber and Overlay.

This business unit is a world leader in the manufacture of high quality filter papers for the food and beverage markets, overlay papers for the composite laminate industry, metallized papers as well as several niche technical specialties.

Second quarter 2004 net sales, were approximately 29% ahead of the same quarter a year ago, which is largely due to a strong performance from the composite laminates, metallized segments as well as strong sales in coffee filter papers.

In addition to that, translation effect of foreign currency also had an impact on revenues.

Volumes increased approximately 17% in the quarter-to-quarter comparison.

Pricing stabilized in our core markets of tea bag and overlay papers in the second quarter and we continued to make progress in the growth and development of our technical specialty segment remain confidant that revenue growth from these new products through the latter part of 2004.

In terms of near-term demand and pricing, demand for tea bag papers is typically soft in the summer months and this year is no different, but demand for coffee filter papers remains strong.

Demand for overlay and metallized products also remains very strong at this point in time.

Near-term outlook for pricing in this business unit is stable with some increases in overlay and metallized products that will favorably impact the second half of the year.

There is some limited availability of certain types of abaca fiber that may drive prices up in the second half of the year that may drive prices in the second half of the year, which could also potentially translate into a price increase for tea bag paper.

The eventual outcome is uncertain since this is in it's early stages.

A couple of comments on new product development.

During the second quarter, approximately 59% of our net revenue came from products less than 5 years old, which was an all-time high for Glatfelter.

As you heard volume growth and Engineered Products and Long Fiber and Overlay papers contributed significantly to this performance and we expect this trend to continue.

This concludes my comments, I will turn it back to you George.

OK, Dante, thank you.

To characterize the quarter, if there has been a busier time in our company I certainly haven't seen it.

As you just heard, we have experienced several positive developments in our business during the second quarter.

Demand and pricing conditions are improving.

Our Engineered Products and Long Fiber and Overlay papers businesses continue to produce attractive growth in sales volume.

We are actively pursuing sale of of HBU and non-strategic woodlands and we continue to drive new product development as the engine of growth across this company.

Glatfelter is entering this cyclical upturn with solid positions in key market niches, a strong balance sheet and a strategy to significantly and sustainably reduce our cost structure.

During the last call, I discussed the North American restructuring program.

This is a company-wide initiative designed to reduce operating costs and further improve our product mix.

Through this effort, we expect to generate financial benefits that are going to begin in the latter part of this year but will approximate $15 to $20 million annually beginning in 2006.

As part of the program we announced an initiative to reduce the workforce at our Spring Grove facility by about 20%.

We intend to achieve this objective without reducing production capacity at the middle.

This is no easy task.

Strong and progressive collaboration with our unionized workforce is a critical factor of success of this effort.

Throughout the quarter we worked hard with our union leadership to negotiate a new labor agreement designed to facilitate elimination of these positions and generate sustainable improvement in operating efficiency.

I am pleased to report that on Tuesday, the company's contract offer was ratified by the local union membership.

The successful negotiation and the ratification of the new contract is a critical accomplishment and that positioned us through revised work rules, outsourcing of non-core jobs and the redesign of individual roles and responsibilities to achieve the financial benefits of the North American restructuring program.

The fact that it was ratified by 84% of the voting membership demonstrates the strong collaborative relationship that we have with our Union at this facility and more importantly the shared commitment to drive cost from our business.

In addition to our restructuring efforts I am particularly excited about the introduction of Performance Plus that Dante spoke about a few minutes ago.

This is our new product portfolio and service program designed specifically for the book publishing industry.

During the first half of this year, Dante and I personally visited many of our major book publishing customers.

We went to listen, but we returned from these visits with the commitment to redesign this product portfolio and develop the best service program in the business.

We introduced Performance Plus to our customer base during the second quarter at a time when demand was strengthening and opportunistic suppliers were pulling away from the book papers market.

The response of our customer base has been universally positive and I am confident that we have reaffirmed our commitment to this key part of our business as well as solidified our leadership position as the supplier of choice in this market.

Upturn or not, the fact is that the difficult fundamentals of our industry remain.

Lately things have gotten better but we have got to have the discipline to look through the cycle to develop an unbiased view of the future potential of our business.

Despite recent improvement, serious structural issues remain that at some time will be undoubtedly resurface.

Glatfelter will be prepared for that day.

The message that I leave with you today is that we are doing the right things.

Restructuring our North American operations is hard work.

Frankly, sometimes, we take two steps forward and one back.

But our efforts during the first half of 2004 have resulted in definite progress.

I am excited about the improving business environment, but at the same time I continue to cast an eye to the fundamentals of our industry and the longer-term challenges that lie ahead.

In this respect I think there are three things that remain critical to our success.

The first is we must continue to drive an unrelenting passion towards specialization and be the supplier of choice in each of our markets.

The second thing is that everybody, everyone in our organization has to understand that today's cost structure is too high for tomorrow's business.

And third, and fundamentally so, we must preserve the strength of our balance sheet and we will.

This is how we intend to run the business going forward.

I thank you for your participation in today's conference call.

I look forward to your questions.

We will now turn it back to Glenn.

Glen Davies Thank you George.

This concludes the prepared remarks section of our call.

And it this time we 're prepared to answer the questions you may have.

I would like to ask our conference call operator to provide with instructions for the Q&A portion of this call.

[OPERATOR INSTRUCTIONS].

Thank you.

Our first question is coming from Christopher Chun of Deutsche Bank.

Hello guys.

Hi Chris.

Hi Chris.

I have a few questions.

First of all, can you talk about your timberland situation?

Relating to that, how much in timberland do you have currently and how much of that you consider sort of core strategic holding and how much, you know, you would be willing to sell over time?

And of the portion that you do intend to sell, how much can be considered higher and better use?

Yes Chris.

This is John Van Roden.

We have about 86,000 acres of timberland currently and at least 2500 acres of that is HBU property.

We are optimistic that we will be able to sell some of that HBU property even this year and also optimistic that when we end the year partly as a result of that that our debt will be down from where it is now.

So in regards to the rest of the timberland, we will continue to evaluate whether it is worth more or less owning it or whether we want to sell more of it, but I think it is clear that the HBU property is definitely right up front there to be sold.

OK great thanks.

And can you clarify for us what the restructuring moves at both Neenah and Spring Grove will entail both on the cost side and on the benefits side.

It seems like on the cost side, for example, at Neenah you took certain one-time charges but then there is also going to be lost volume going forward.

So those, if you say that you know there is going to be lost contribution for each ton of volume that you lost that would be sort of an ongoing cost.

Right.

And I am wondering you know what the magnitude of that is.

And then on the benefit side of course, you mentioned in your press release that the benefit that you expected to see will probably not be realized in '04 but whether you feel confident about that you know in the outer years and what you are expecting to see there and similarly at Spring Grove.

I know that is sort of a lot....

OK.

Let me start out and I will sort of take you back to where we began this process and then any of my colleagues want to add something to that, that would be fine.

But when we announced that program we said we would have benefits from that of between $8 and $11 million.

Right.

Neenah.

And we also said at the time we announced that we said we would take a charge of between $20 and $28 million for that.

We have taken a charge of $14 million to date.

So our one-time charge will be a lot less than we said it would be.

We have not -- as we say in our press release and I said in my comments, we have not gotten the benefits of that yet this year and we do not expect to get the full range of benefits this year.

We had some operating inefficiencies that were part of the cycle, we took out half of the workforce there.

We had yield and fiber loss in the first part of the year.

Most of those problems are fixed.

We can -- we will begin to see higher fiber costs and energy cost which go very high there.

But we are confident that once we fix those operational inefficiencies, which as I said are almost all fixed now and as fiber and energy get down to more normal levels that we will be able to achieve what we said we would there.

Dante, you want to add to that?

Or anybody?

Just a comment, the paper machine that was shutdown took approximately 25% of the mill's capacity offline.

That would be - it would equate to about 36,000 to 40,000 tons per year mix adjusted.

And our analysis of that business over the cycle was that that's zero margin business.

So we don't feel disadvantaged by not having that capacity in our portfolio as we look forward.

OK thanks.

And you said $14 million in charges to date.

Are you still expecting $6 to $14 million more or ...

No, no, no.

We could have more.

We have some contractual issues that we are trying to work through that would make the operating earnings better if we can, and there could be further charges from that, but I don't see us getting anywhere near where we thought we would have.

OK, thanks.

What about on the benefits side?

Do you have a feel yet or an estimate of when you know the benefits should start to roll through?

Well, I think certainly in '05.

The full extent of that somewhat depends on what prices do, what energy costs do, what pulp does.

Right.

But the operating inefficiencies will be gone, number one and we will have taken the cost out that we set about to get out in the first place.

OK great.

And then on fiber side, is it just market pulp or ...

Yes.

OK.

Can we do a similar analysis for Spring Grove?

Did I hear, I think George was talking about it, that you are not expecting to lose any volume as a result of the restructuring there?

That is correct Chris.

When we looked at restructuring the operations in Spring Grove.

We identified approximately 175 positions, most of which were hourly positions that we believed that we could take out of the mill.

But our intent is to continue to operate the mill at full production capacity which leads to some of the things that I was talking earlier about, really workforce redesign.

How we eliminate redundancy, how we combine positions, how we more efficiently and effectively do the work that needs to be done.

And that is the collaborative effort that we are engaged with through the negotiating process with our local union and in fact we will be continually engaged with going forward as we redesign our workforce at that facility.

OK, thanks.

And can you talk about you know how much in charges are involved in this restructuring program and then, you know -- I think you mentioned $15 to $20 million by '06 -- but whether we should expect to see some of those benefits start to roll through a bit sooner than that.

Yes.

First of all Chris, the charges we said would be between $9 and $20 million which we would take in the third quarter.

OK.

And it depends on how many people go out under the early retirement plan, but also that a portion of that, actually it is about two-thirds of the charge will come from the over funded pension plan.

OK.

What was the second part of the question?

In terms of when you expect that benefits will roll through?

Oh yes.

Yes we will see some of those benefits being phrased in during 2005, but the full annualized benefits will be between $15 to $20 million starting 01/01/06.

I think it is important to realize Chris, on previous calls when we talked about the North American restructuring plan, this is really a two-year plan, with payback beginning to be generated in '05 for the most part and then completely realized by 01/01/06.

OK.

Just one last question guys.

Can you talk about how much in pensionion income you had this quarter and how that compares year-over-year and quarter-over-quarter?

Yes - we had 4 - 4 - it is $4 million in the quarter and it is up slightly I think from last year's first quarter - I mean second quarter.

It is about the same.

OK very good.

Thanks a lot guys.

[OPERATOR INSTRUCTIONS] Thank you your next question is coming from Jan Lobe of Chesapeake Partners.

Hi.

Can you tell us about the SEC and are they - have they chosen to review and timing on the sale of stock.

We don't know that yet Jan.

We have not heard from them.

OK.

Thank you.

Thank you.

We do have a follow-up question coming from Christopher Chun of Deutsche Bank.

Hey guys, can you tell us about what your CapEx is looking like for the year and how that compares to the depreciation?

Our depreciation is about $51 million and CapEx is budgeted at about $36 million.

OK, great.

Let's see.

I do have one more question I believe.

On the book paper side, are you seeing any effect of Boise exiting that market?

Yes, Christopher, Dante Parrini.

We are - obviously Boise wasn't a large player but they had a pretty significant position at one or two key accounts and some of the market share that we are in the process of regaining is by replacing Boise at these accounts and we also attribute our Performance Plus program as a key contributing factor to us being awarded that piece of business.

Right and Dante, are you seeing any effect of maybe shifting market shares between coated book papers and uncoated book papers?

Where we would see that most Chris is in the educational publishing side and we play a lot in the college text book arena and obviously the (inaudible) guys start to see a lift in pricing and demand is tied across those segments too, so we have had a pretty strong demand for our film-coated product that is sold into similar applications.

Right.

OK.

Thanks guys.

I think that exhausts my questions.

[OPERATOR INSTRUCTIONS] Thank you.

We also have a question coming from Will Nasgovitz of Heartland Funds.

Good afternoon - or good morning - excuse me.

Good morning.

I apologize.

I have got here on the call a little late, I just was reviewing your press release and, help me understand this correctly, is it a fair assumption -- and please correct me if I am wrong - that the price increases didn't really come into play this quarter but they are coming into play the next.

Let me see if I can tackle that.

Will, this is George Glatfelter.

Our business is a specialized business and historically the pricing that are experienced by the commodity players in this industry roll towards our company but there is a lag of generally a quarter to perhaps two quarters.

What we have seen progressively, with progressive bigger, since the beginning of the year, has been improvements, first of all in commodity pricing and then that has rolled forward into our book publishing business and some of our more specialized business as well.

It is clear to me as I look at the trends in this industry right now, that there has been a shift overall, we have experienced for the past four years at a minimum, it is clear to me that pricing across the board has improved.

That has been supplemented with strong demand.

We clearly have seen the demand and we are progressively experiencing the pricing side of things.

Thanks for clearing that up and I apologize for having you cover it again.

Thank you.

No problem.

At this time, there appear to be no further questions.

And I would like to thank everyone for their participation.

This does conclude this morning's conference.

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