Mativ Holdings Inc (MATV) 2002 Q1 法說會逐字稿

Good day ladies and gentleman and welcome to the Schweitzer-Mauduit conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Instructions will follow at that time. If you anyone should require assistance during the conference please press the pound key followed by zero on a touch tone telephone.

As a reminder this call is being recorded. I would now like to introduce your host for today's conference Mr. Paul Roberts. Mr. Roberts, you may begin your conference.

Thank you Holly. Good afternoon, as Holly said, I am Paul Roberts the chief officer at Schweitzer-Mauduit International. With me today is

our corporate controller. Thank you for joining us for a review of our first quarter 2002 financial results.

After discussing our results we will open the phone lines for questions. Our conference call today is later in the day than as typical because of Schweitzer-Mauduit International's annual stock holders meeting and the board of directors meeting held earlier today. If for any reason you did not receive our

press release today please call 800-514-0186 and the copy will be faxed to you.

Various comments or remarks that we may make during today's conference call concerning future expectations, claims and prospects for the company, and anticipated financial and operating results constitute forward looking statements within the meaning of the private securities litigation reform act of 1995 and are subject to the safe harbor created by that act.

The forward looking statements are based upon management's expectations and beliefs concerning future events and factors impacting the company. There can be no assurances that such factors or events will occur or that the company's results will be as estimated. Many factors outside the control of the company could also impact the realization of such estimates.

Such factors are discussed in more detail in the company's securities and exchange commission reports. Including the company's annual report on form 10k for the year ending December 31, 2001. Prior to a detailed discussion of our financial results, I will review the highlights of the quarter. The rooted earnings per share were 57 cents compared with the rooted earnings per share of 25 cents in the first quarter of 2001. An improvement of 128 percent.

Net sales totalled 122.4 million dollars for the quarter, a decline of 1 percent from the prior year quarter. This decrease is primarily driven by unfavorable currency exchange rate changes and lower sales volumes in our Brazilian business. The company's gross profit margin improved from 15.7 percent in the first quarter of 2001 to 22.2 percent in the current year quarter.

The gross profit margin improvement reflected a decline in the per time cost

, improved

operations in the United States, increased sales volumes in our

businesses, improvement in the mix of products sold in Brazil and the declining in Brazilian business taxes. Operating prices for the quarter was 15.2 million dollars, an improvement of 7.4 million dollars, or 95 percent from the prior year quarter.

Capitol spending for the quarter totalled 2.9 million dollars compared with 19.4 million dollars in capitol spending in the first quarter of 2001. The prior year spending included 15.3 million dollars for the banded cigarette paper project. Earlier today we announced the planned expansion of reconstituted tobacco leaf adaption capacity that LTI industries, one of our French subsidiaries, had a capitol cost of approximately 59 million dollars.

I will now provide a more detailed review of our first quarter financial results and our outlook for the balance of the year. Net sales for the quarter pulled 122.4 million dollars, a 1 percent decline in net sales. This decline was a result of unfailurable changes in currency exchange rates, partially off set by changes in sales volumes and higher average selling prices.

Changes in currency exchange rates, reduced net sales are 4.3 million dollars or 3 percent compared with the first quarter of 2001. The

was approximately 7 percent weaker versus the U.S. dollars for the quarter while the Brazilian

declined by approximately 16 percent. Unit sales volumes for the first quarter declined by 3 percent compared with the prior year quarter.

Changes in sales volumes however have a positive 1.4 million dollar impact on the net sales comparison as increased sales of tobacco related papers with a higher sales value per ton more than off sets the unfavorable impact on the net sales comparison of low sales of commercial and industrial papers that have a lower sales value per ton.

Sales volumes for the French businesses increased by 9 percent from the prior year quarter with higher sales of both tobacco related papers and reconstituted tobacco leaf products. This sales improvement is related to increased shipments to most of the French businesses primary markets. Sales volumes in the United State declined by 5 percent compared with the prior year quarter.

This decline was experienced in both tobacco related papers and in commercial and industrial papers. U.S. sales volumes in the first quarter of last year had increased by 14 percent over the first quarter of 2000. As the 2001 first quarter benefitted from an inventory build by a major domestics customer. Total U.S. secret industry shipments increased by approximately 3 percent during the quarter compared with the first quarter of last year.

Reflecting wholesalers decision to rebuild their inventories after the January 2002 federal excise tax increase. Adjusting for promotional activity and trade inventory changes, it is estimated that U.S. cigarette industry buy ins would have declined one to 2 percent versus the prior year quarter. According to the USDA, the export of cigarettes from the United States declined by 10 percent for full year 2001 versus 2000.

for our Brazilian business declined by 31 percent for the quarter compared with the first quarter of 2001 as a result of lower sales of commercial and industrial papers. Sales of tobacco related papers were higher than during the top provoked prior year period. Due to increased sales of tobacco related papers to South American countries outside of Brazil.

The

sales of commercial and industrial papers in Brazil were the result of a decision made in mid 2001 to exit the printing and writing unquoted papers business in Brazil. Somewhat higher average selling prices were experienced during the quarter having a favorable impact of 1.2 million dollars on the quarterly net sales comparison.

Higher average selling prices were experienced in each of the three businesses. The higher average selling prices in the United States were the result of the amortization of differed revenue related to the banded cigarette paper project which was off set by higher depreciation expense related to that project. Gross profit increased from 19.5 million dollars in the first quarter of 2001 to 27.2 million dollars in the first quarter of 2002, an improvement of 7.7 million dollars, or 39 percent.

The gross profit margin improved from 15.7 percent in the first quarter of 2001 to 22.2 percent in the first quarter of this year. The improvements in both gross profits and gross profit margin were attributed to lower per ton

costs, improvement operations in the United States, increased sales volumes in French businesses and both the improvements of products sold and the lowered local business taxes in Brazil.

The list price of northern bleached softwood cracked pulp, the

pulp grade, averaged approximately 470 dollars per metric ton in the United States during the first quarter compared with 680 dollars per metric ton in the first quarter of 2001, a 31 percent decrease. The lower per ton

pulp cost had a favorable impact on operating expenses of 5.3 million dollars compared with the first quarter of 2001.

Although this benefit was partially off set by certain contractual selling price reductions related to the decline in per ton

pulp costs while this price of northern bleached softwood cracked pulp decreased somewhat during the first quarter but is expected to be approximately 470 to 480 dollars per metric ton in April. It does appear that the bottom has been reached in the pulp price cycle.

Pulp price increases have recently been announced for some grades of pulp although it is too early to determine whether such pulp price increases will be sustained. Several pulp producers are reportedly currently taking or are expected to take down time in order to reduce market pulp inventories in order to strengthen pulp prices.

Purchased energy costs did ease somewhat during the quarter having a favorable 400,000 impact from the year to year comparison. Lower energy costs in both France and the United States were partially off set by an increase in electricity rates in Brazil. During the first quarter operating costs at the U.S. mills were approximately two million dollars favorable compared with the prior year quarter.

The construction phase of the banded cigarette paper project at the spot to know it is now over and we have been able to focus on improving operations at that mill. Improvements were also realized during the quarter at the

mills in the United States. Manufacturing costs in the United States also benefited from an increase in finished product inventories as part of contingency planning requested by customers defense of our labor negotiations at the

mills later this year.

Non manufacturing expenses increased by 300,000 dollars during the quarter. Increased selling expenses were experienced in the French businesses in support of the increased sales volumes. Higher general expenses resulted primarily from increased compensation and benefit costs. Operating profits were 15.2 million dollars for the quarter, an increase of 7.4 million dollars or 95 percent from the prior year quarter.

Operating profit return on sales is 12.4 percent for the first quarter compared with only 6.3 percent in the first quarter of last year. The quarter to quarter operating profits and operating profit return on sales comparisons were affected by the same items that impacted gross profits partially off set by the increase in non manufacturing expenses.

Out dating profit in France was 3.1 million more than the prior year quarter. This improvement in operating profit was the result of increased sale and production volumes, liter per ton

pulp costs and the declined in purchased energy expenses. Operating profit in Brazil was 2.5 million dollars higher than the first quarter of 2001 attributable to lower per ton

costs, somewhat higher average selling prices, a decline ICMS expenses which is a form of value added business taxes for certain grades of printing and writing papers, and the benefits of the restruction program implemented in mid 2001 which contributed to an improved mix or products sold.

Operating profit in the United States increased by 1.9 million dollars attributable to improved mill operations, primary

and lower per ton

pulp costs. These favorable factors were partially off set as a negative impact of lower sales volumes.

of these effective income tax rate of 34.2 percent for the first quarter compared with an effective income tax rate of 36.6 percent in the first quarter of 2001.

The 2002 effective income tax rate benefitted from a decline in the French corporate income tax rate from 36.3 percent in 2001 to 35.3 percent in 2002. The lower effective income tax rate in the current year quarter also reflected the benefit of increased profitability in Brazil which has the companies lowest corporate income tax rate. Minority interest in the earnings of subsidiaries was one million dollars in the current year quarter, an increase of 300,000 dollars over the prior year quarter reflecting improved profitability in our French reconstituted tobacco business.

Net income for the quarter totalled 8.6 million dollars, an increase of 4.8 million dollars or 126 percent, a net income of 3.8 million dollars in the first quarter of 2001. Diluted earnings per share were 57 cents in the quarters compared with diluted earnings per share of 25 cents in 2001, an improvement of 128 percent. Capitol spending for the quarter totalled 2.9 million dollars compared with 19.4 million for the first quarter of 2001.

Capitol spending in the prior year quarter included 15.3 million dollars for the banded cigarette paper project at the

mill. During the first quarter of 2002, Schweitzer-Mauduit's cash balance declined by 39.8 million dollars and ended the quarter at 11.1 million dollars. That was reduced by 43.7 million dollars during the quarter and totalled 59.2 million dollars as of March 31, 2002.

As a result the companies total debt to capitol ratio improved from 36 percent at the end of 2001 to 24 percent at the end of the first quarter. This reduction in both cash and debt outstanding does not reflect a change in the company's capital structure strategy but rather reflects the affective utilization of a new bank credit facility that has entered into during January 2002.

This new bank credit facility provides increased flexibility for the company. Schweitzer-Mauduit will increase it's debt outstanding in future periods as needed to support strategic opportunities or other cash requirements. Earlier today Schweitzer-Mauduit announced plans to expand reconstituted tobacco leaf or RTL production capacity in France. This capitol project is expected to cost approximately 59 million dollars.

Construction of the new production line at LTR industries was 72 percent indirectly owned subsidiary is expected to commence operations during the third, or construction is expected to commence during the third quarter of this year with start up expected in the first quarter of 2004. This project will increase annual RTL production capacity by approximately 33,000 metric tons and will permit LTR industries to support anticipated future demand for RTL in Western Europe and in several other key markets.

The production capacity could be added by this project, is expected to be an important contributor to the future earnings growth of our company. This project is expected to be financed with internally generated funds and existing bank credit facilities. Capitol spending for the RTL expansion project is expected to be approximately 15 million dollars in 2002, 40 million dollars in 2003 and 4 million dollars in 2004.

Including this project total capitol spending in 2002 for Schweitzer-Mauduit is now anticipated to be approximately 40 million dollars with total capitol spending in 2003 projected to be approximately 60 million dollars. Earlier today Schweitzer-Mauduit announced a quarterly common stock dividend of 15 cents per share. This dividend will be payable on June 10, 2002 through stock holders of record on May 13, 2002.

The company has declared and paid quarterly dividend of 15 cents per share since the second quarter of 1996. It is anticipated that future common stock dividends will remain at the current level. In January, Schweitzer-Mauduit issued a press release providing earnings per share guidance for 2002 in the range of two dollars. The company is now expecting diluted earnings per share for the year to be in the range of two dollars, up to two dollars and 10 cents.

Improvement is anticipated for the year in each of our businesses as experienced during the first quarter. The market for Schweitzer-Mauduit's products are expected to remain relatively stable. Increased tobacco related paper sales volumes are anticipated in several key markets. Total sales volumes during the second quarter of this year however are expected to be less than during the second quarter of last year as a result of exiting the printing and writing unquoted papers market in Brazil.

prices are expected to be fairly stable for the balance of the year although the current level of

pulp costs and the strong

versus the

continue to assert some pressure on its selling prices. Per ton

costs firmly appear to be near the bottom of the pulp price cycle and cost of product soared for the second quarter is expected to benefit from lower pro ton

pulp costs compared with the prior year.

During the second half of this year however pro ton

pulp costs are expected to be approximately at or slightly above the level of the comparable 2001 period. The demanding activities of the construction phase of the banded cigarette paper project at the

mill have now been completed. Based on first quarter experience, an improvement in stocks with mill operations is anticipated during the balance of this year.

Schweitzer-Mauduit is not however currently expecting a significant increase in the production and sale of banded cigarette paper during 2002. Cigarette manufacturers have not finalized their plans for the use of this product. We continue to work with our domestic customers in the development of reduced higher risk cigarettes. In addition to banded cigarette paper, Schweitzer-Mauduit is actively involved in the development of a print banded reduced higher risk

.

They've done a number of patents

by sub licenses concerning that technology and have taken steps to make limited commercial capacity available for this product. The restructuring of the Brazilian operations that occurred mid year 2001 is expected to continue to provide benefits for the balance of this year. Without the sale of the marginally profitable printing and writing unquoted papers and improved mix of products sold and better operating results are expected in Brazil.

The company's effective income tax rate is expected to be in the range of 34 to 45 percent with a balance of 2002. That concludes our planned comments. Holly could you please open the phone lines for questions?

Thank you Mr. Roberts. Ladies and gentleman, if you have a question please press the pound key followed by zero on your touch tone telephone. Your questions will be answered in the order which they are received. One moment Mr. Roberts while I assemble the questions. Our first question comes from

.

Hi Paul.

Hi Steve.

I guess my question revolves, you had a spectacular first quarter but yet given the street estimates that are out there it would indicate that the remaining three quarters of the year are going to be down to get to two dollar level. I know you're talking about the fourth quarter being difficult because of maintenance but I don't understand why the number is looking at what you earned last year and what the expectations are for this year. It just seems like it's awful conservative.

Well Steve as we did mention in the press release we are expecting the fourth quarter to be our softest quarter of the year probably significantly so and our first quarter the strongest quarter of the year. We are expecting to have probably a neutral of sight

negative pulp price comparison the second half of the year. We expect pulp prices to be favorable in the second quarter but again year over year, not near as much.

We also did mention that there was so benefit of inventory build in the United States during the first quarter as part of contingency planning related prior to labor negotiations. Our contract of stocks that expires in mid June. Our contract at Lee in August, and again this is something precautionary we do each time we have

negotiations.

No, for certainly the last 20 years or so people have had no

in the United States. And again assuming, following conclusion of those we were proud to bring our inventories back down which would have a little bit of a negative.

Okay so essentially the quarters are going to be probably flattened down the next two and then a very poor fourth quarter. Or down fourth quarter because of maintenance.

maintenance last year?

Last year we had maintenance spread a little bit more during the year. We also have a couple capitol projects that we will be implementing that will take a little bit more down time than usual for some quality and productivity upgrades in some of our equipment.

Okay.

, can you tell me, are they totally out of business in the cigarette paper business in the U.S. or are they back in business?

Well

as you may be aware was sold by

to

in August of last year and

contract expired in October. October 1. In the middle of October they did go on strike. They were out about a month and then they came back. They came back working under the aspired contract. During the period of time that they

their customers were forced to look elsewhere for, to satisfy there needs.

My understanding is that that volume has not gone back to

. Last Friday the 19th,

did give notice under the

that it was going to have a significant reduction in it's work force at

and they mentioned that there would be a lay off 330 people out of the remaining work force of about 650. And newspaper articles that followed it did report earlier this week that

had mentioned that as of late June they would not have any additional tobacco papers orders or did not have any in hand.

So it does appear that

has had difficulties in the market place and from what they have said they may not be producing tobacco related papers after late June, early July.

Paul if you could refresh my memory, how much of the U.S. market did

have and how much have you picked up of their business?

Well at one time

probably had about a 30 percent share of the U.S. market. That has been certainly declining over time. Our share in the U.S. market was probably in the low to mid fifties but has increased

several years to be a fair amount higher than that. We have not taken all of

volume in North America. A, some of their volume has gone to, to European suppliers.

All right. I'll assume

. Thanks Paul.

Thank you Steve.

Our next question from

.

Hi Paul.

Hello

.

I have a couple questions. One I think Senator

was to introduce a bill today trying to standardize fire safe cigarettes. Do you have any comments on that legislation?

we have seen similar information that apparently several senators including Senator

from Illinois was scheduled to introduce legislation today. I think one of the concerns is that if different states implement different standards for reduced fire risk cigarettes, that could be very difficult for the cigarette manufacturer to comply with.

As you know New York has a law that has been passed that would require this in July of next year to

several states including Massachusetts, Minnesota, New Jersey, Rhode Island are considering similar legislation and I have, we have press reports that Philip Morris is supportive of national legislation to standardize these.

with national legislation laws called for cigarettes that self extinguish. I think that would certainly be positive for the demand of reduced fire risk cigarette paper which we sell. And again it may be one of the reasons that cigarette manufacturers are waiting to see how the different standards sort out before they make commitments in this area.

Okay. And then in relation to your announcement about the expanding of the RTL facility, the additional

is that driven by additional customer orders or do you have any kind of guarantee orders support that line?

That's driven

by increased demand by our customers. They are not firm orders certainly at this point for a product that would be shipping 72,000

but the demand is really being driven by growth and both demolated and blended cigarettes as we said in the press release. There are several countries that have instituted different health standards.

Brazil, the

for instance that kick in at various times that require lower

delivery standards and reconstituted tobacco is one of the key tools to allow the cigarette manufacturers to achieve that. So this capacity will provide the opportunity for our French subsidiary to increase their capacity to respond to that increasing down there.

From thus current customers and maybe potentially new customers.

Yes,

. Both. And for instance the

is expected, well have said that all cigarettes have to be at 10 milligrams of tar beginning in 2004. There's also new standards coming out for rolling your own cigarettes in the

. And we are expecting that, a significant amount of the new capacity would service the western European market and increase demand there.

Okay. And then also along those same lines you're going to

the project through, I think you said internally generated funds and bank credits. Can you give a break out between those two right now?

Well again it's going to depend what cash we have available. As we mentioned earlier in the conference call we've paid down quite a bit of our debts so we have quite a bit of debt capacity available. We did mention in our 10K, gave specific members as far as what our remaining debt capacity is and all I can really say specifically is that we've got adequate flexibility to turn to our bank credit facility if we don't have sufficient cash on hand.

Since the capital spending will occur over a three year period, actually 24 calendar months essentially but over three different calendar years, we will be generating addition internal funds during that period of time and our French reconstituted tobacco business is one of the major generators of cash that we have.

Great. Great. Nice quarter. Thank you Paul.

Thank you

.

Our next question comes from Terry O'Conner.

Hello Terry.

o'conner: Hey Paul, how are you?

Very good.

o'conner: You own 72 percent of LTRI. Is the

cost 82 million or something like that and yours is 59 or can you increase your ownership in LPRI via this apple project?

The capital cost that recorded is the total capitol cost of the project.

o'conner: You're putting up all the money then?

Well the money is being all put up by LTRI industries by the entity that we own 72 percentile.

o'conner: Okay so when you talked about the additions to capital for this year, this year was 15, next year is 40, the following year is four, that's 59 but

you're putting up a lot of money though.

Well all of LTRI's capital spending each year is all reflected without capital spending.

o'conner: Okay it's taken out of a minority interest line or something?

Well the earnings come out on minority interest. But their, their income statement

cash flow are all consolidated into ours and then the earnings elimination

are prior to earn that income.

o'conner: And so I'm trying to think of this in terms of the practical effect of this. So say they have to put up their share of this money somehow.

Again that will be

because it will be coming really from, the financing will come from LTRI and it

most effective way is that if they had to

they would

from another subsidiary of ours.

o'conner: Okay. All right. Is your idea here, this new line is a very big capacity increase, about 70 percent. Presumably it's gonna run more efficiently than the smaller line. Is your plan to use the big line, the big new line first, take the small line out and then fill that one up last?

We have two existing lines today.

in France. One that's significantly larger and more cost effective than the other one. Our plan is to initially shut down the smallest of what would then be two lines which will give us an improvement in terms of available cost production. Moving the product onto the more efficient new machine and then as the man grows then we will bring on the, bring back the smaller machine

basis.

We have had quite a bit of experience doing that in the past here when we

in 1995 at that point we were only operating one of the two machines at LTRI on an intermittent basis and we would do the same thing until it's total capacity is needed again.

o'conner: Do you think that a brand new machine would be any more efficient than the larger machine that you're running now?

It will be somewhat more efficient but not significantly.

o'conner: Right. Thank you.

You're welcome.

Those are all the questions I have this time Mr. Roberts. Shall I repeat the instructions?

Yes you will please Holly.

Okay. If anyone has a question at this time please press the pound key followed by zero on your touch tone telephone.

Our next question comes from

.

Good afternoon Paul.

Good afternoon Andrew.

Just following up on the RTI expansion in France. Could you say what the average selling price for a ton of that paper is?

We don't give that out for competitive reasons Andrew. So I really couldn't comment.

Okay can you comment then on what your current capacity in tons is?

We did mention that after this expansion we would be about 80,000 metric tons at which we'll be adding about 33,000 to it. So our total today is roughly 37,000.

Fair enough. Okay. Thanks a lot and great quarter.

Thank you Andrew.

The next question comes from Terry O'Conner.

o'conner: I'll ask about the printed banded paper. You said you had a possibility or you are currently supplying limited commercial quantities of that. I suppose that's for fast runs for other customers.

Well what I did say Terry is we've taken steps to make commercial

available. We do have alternative technology. Fairly reduced fire risk cigarettes and we have been working with customers on that. And we felt that they were far enough along that we would invest some money in a limited amount of commercial capacity and that would

on stream later this year. But we are not using it at this point. It is not up and running but it would be later this year to meet customer's demands.

o'conner:

A portion is at

o'conner: Could you discuss how that product stacks up next to the Philip Morris banded product in terms of performance characteristics and

not allowed to do that?

I'm not capable nor able to.

o'conner: Would it be an effective substitute for somebody who's in a hurry and doesn't have the banded paper?

you're gonna be up the creek if they don't get something ready to go here soon.

Yeah again,

this alternative print on the technology is a viable alternative and we are not a ruler of any of our competitors that are along as far as we are and we have two that we believe are very viable alternatives for the market place. And again based upon work that we have done with our customers we believe it is successful and we wouldn't have again taken additional steps to increase capacity in this area.

Again I think also one of the things that, going back to the national legislation that was apparently introduced today, very important to see what the final standards are, that does come out relative to reduced fire risk cigarettes.

o'conner: All right. Could you comment on whether as you see things now you'd be economically indifferent between licensing the original technology or selling paper with the new technology which I assume you own 100 percent.

I couldn't really comment on the economic aspects of it. I think the alternative is really going to be up to our customers. What they feel looks best for them. But we want to do is be able to provide them an alternative.

o'conner: Thank you.

Thanks Terry.

Our next question comes from Bruce Prescott.

Hi Paul. Paul just a question back on the RTL. You talked about the

. Did you give us what the capacity in terms of metric tons on the small

that you make

.

No we haven't broken that out publicly Bruce. Again it's, it's all at one plant in France that's two separate production lines but it's all in one mill.

. Did you see the poll up on the capacity and the printed banded facility in

? Do you give us any guidance as to at this point

what capacity you have occurred?

No we haven't.

Thanks.

Thank you Bruce.

Our next question comes from

.

Hi Paul. Congratulations on a great quarter.

Thank you,

.

Quick question on the RTL business.

any interest of

in the last couple of quarters.

profitability

. I'm just curious of what the reason for that is and what you think the environment will be for the rest of the year.

I would say that that really is more seasonality than anything else. Again if you look at the first, look at last year in the first quarter was one of our weaker quarter's as well.

Right.

And again we're very optimistic about what our RTL business is.

So for the rest of 2002

earnings from the RTL business will be significantly higher.

We're expecting a good year out of RTL.

Terrific. Again congrats.

Thank you

.

Those are all the questions we have at this time Mr. Roberts. Shall I repeat the instructions?

No that's not necessary Holly.

I'd like to thank everyone for taking the time to join us today. Good bye.