Mativ Holdings Inc (MATV) 2003 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Schweitzer-Mauduit International second-quarter 2003 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (CALLER INSTRUCTIONS). As a reminder ladies and gentlemen, this call is being recorded today Thursday, July 31, 2003. Thank you. I would now like to introduce Mr. Paul Roberts, Chief Financial Officer of Schweitzer-Mauduit International. Mr. Roberts, you may now begin your conference.

Good morning and with me today is Wayne Grunewald (ph) our Corporate Controller. Thank you for joining us for a review of our second-quarter 2003 financial results. After discussing our results we will open the phone lines for questions. If for any reason you did not receive our earnings press release issued earlier today you may access it on our website, www.Schweitzer-Mauduit.com, or call 800-514-0186 and a copy will be faxed to you.

Today's conference call will also be available on our website. Various comments or remarks that we may make during today's conference call concerning future expectations, plans and prospects for the company and anticipated and financial 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 10-K for the year ending December 31, 2002. Prior to a detailed discussion of our financial results, I will review the highlights of the quarter.

Diluted earnings per share were 47 cents compared with diluted earnings per share of 54 cents in the second quarter of 2002, a decline of 13 percent. Earnings for the current year quarter were unfavorably impacted by increases in wood pulp, purchased energy, labor and nonmanufacturing costs and by changes in currency exchange rates and work stoppages in France. These factors were partially offset by increased volumes in France, higher average selling prices and a lower effective income tax rate.

Net sales totaled $141.7 million for the quarter, an increase of 13 percent. This increase was driven by changes in currency exchange rates, increased sales volumes and higher average selling prices. The company's gross profit margin was 17.6 percent in the second quarter of 2003 compared with 21.7 percent in the prior year quarter. The lower gross profit margin reflected the impact of the various cost pressures already mentioned.

Operating profit for the quarter was $10.8 million, a decline of $4.1 million or 28 percent from the prior year quarter. Capital spending for the quarter totaled $15.6 million compared with $5.2 million in capital spending during the second-quarter of 2002. The current year spending included $10.2 million related to the construction of a new reconstituted tobacco leaf production line in France.

I will now provide a more detailed review of our second-quarter financial results and our current outlook for the balance of the year. Net sales for the quarter totaled $141.7 million compared with $125.5 million for the second quarter of 2002, a 13 percent increase. Changes in currency exchange rates increased net sales by $11.5 million or 9 percent compared with the second quarter of 2002. The euro was approximately 27 percent stronger versus the U.S. dollar for the quarter while the Brazilian real declined by approximately 18 percent.

Unit sales volumes for the second-quarter increased by 2 percent compared with the prior year quarter having a favorable $3 million impact on the net sales comparison. Sales volumes for the French businesses increased by 3 percent from the prior year quarter with gains in all major grades of tobacco related papers as well as in reconstituted tobacco leaf products. This sales improvement was related to increased shipments to most of the French businesses primary markets.

Sales volumes in the United States improved by two percent compared with the prior year quarter. This gain was primarily attributable to increased sales of commercial and industrial papers. Sales of tobacco related papers to our North American customers were approximately at the prior year level. Total cigarette industry shipments decreased by approximately 2.5 percent during the quarter compared with the second-quarter of last year. According to the United States Department of Agriculture export shipments of cigarettes declined by approximately 9 percent during the first quarter of 2003, the most recent period recorded.

For full year 2003 we are anticipating that U.S. cigarette consumption will decrease by approximately 2 to 3 percent with U.S. cigarette production declining by a similar percentage. Sales volumes for our Brazilian business declined by 4 percent for the quarter compared with the second quarter of 2002. A decline was experienced in most major grades of tobacco related papers reflecting the impact of weak economic conditions on cigarette consumption in Brazil and increased market penetration by contraband cigarette in that country.

Lower sales of tobacco related papers were partially offset by somewhat sales of commercial and industrial papers in Brazil, however, the demand for and the pricing of commercial and industrial papers remain under pressure in Brazil as a result of poor economic conditions. Somewhat higher average selling prices were experienced for the company during the quarter having a favorable $1.7 million impact on the quarterly net sales comparison.

Higher average selling prices were experienced in France and Brazil with average selling prices in the United States approximately at the same level as in the prior year quarter. Gross profit decreased from $27.2 million in the second quarter of 2002 to $24.9 million in the second quarter of 2003, a decline of $2.3 million or 8 percent. The gross profit margin declined from 21.7 percent in the second quarter of 2002 to 17.6 percent in the second-quarter of this year.

The changes in both gross profit and gross profit margin were attributable to higher per ton wood pulp costs, increased purchased energy expenses and higher labor rates. The list price of Northern Bleach Softwood Kraft pulp and (indiscernible) weathered pulp grade averaged approximately $580 per metric ton in the United States during the second-quarter compared with $480 per metric ton in the second-quarter of 2002, a 21 percent increase.

The higher per ton wood pulp cost had an unfavorable impact on operating expenses of $2.4 million compared with the second-quarter of 2002. The list price of Northern Bleach Softwood Kraft pulp remained unchanged at $580 per metric ton throughout the second quarter. The per ton list price is expected to decline by approximately $30 per metric ton in the month of July. This lower anticipated pulp price reflects above normal industry wide pulp inventories and weak worldwide economic activity.

Purchased energy costs increased during the quarter having an unfavorable $1.1 million impact on the year-to-year comparison. Higher energy costs were experienced in each of our business units related primarily to higher natural gas and fuel oil costs. Non-manufacturing expenses decreased by $1.8 million or 15 percent during the quarter. Higher selling, research and general expenses were experienced.

The increase in non-manufacturing expenses was primarily in our French operations as a result of the strengthened euro versus the U.S. dollar and inflationary cost increases. Non-manufacturing expenses as a percent of net sales increased from 9.8 percent in the second-quarter of 2002 to 10.0 percent in the current year quarter. Operating profit was $10.8 million for the quarter, a decrease of $4.1 million or 28 percent from the prior year quarter.

Operating profit return on sales was 7.6 percent for the second-quarter compared with the 11.9 percent in the second-quarter of last year. The quarter-to-quarter operating profit and operating profit return on sales comparisons were affected by the same items that impacted gross profit as well as by the increase in 2003 non-manufacturing expenses. Operating profit in France was $1.8 million less than the prior year quarter. This decrease was the result of increased wood pulp, purchased energy, labor and non-manufacturing expenses, work stoppages in France and currency exchange rate changes.

The work stoppages in France reduced second-quarter 2003 operating profit by an estimated $1.4 million or 6 cents per share and were the result of hourly employees demonstrating sympathy with general strikes over the national pension issues in France. Increased production and sales volume and higher average selling prices had a positive impact on operating profit in France during the quarter. Operating profit in Brazil was $1.3 million lower than the second-quarter of 2002 attributable to lower production and sales volumes and higher wood pulp, purchased energy and non-manufacturing costs partially offset by higher average selling prices.

Operating profit in the United States declined by $900,000 compared with the second quarter of 2002. This decrease was the result of increased wood pulp, purchased energy and labor expenses. Average selling prices in the United States were approximately at the prior year level and it did not offset the cost increases. During the second-quarter of 2002 operating profit for the United States was unfavorably impacted by approximately $1 million related to a strike of the hourly employees at the Spotswood, New Jersey paper mill.

Interest expense was $400,000 lower for the second-quarter of 2003 versus the prior year quarter as a result of lower average interest rates and increased capitalized interest related to major capital projects. Other income was a loss of $1 million during the second-quarter of 2003 compared with income of $400,000 in the second-quarter of 2002, an unfavorable change of $1.4 million. This difference was primarily attributable to foreign currency losses related to the impact of changes in the euro and the Brazilian real versus the U.S. dollar on non-local currency denominated assets and liabilities in the foreign subsidiaries of the company.

Including the net impacts on operating profit, other income, and the other income statement line items, currency exchange rates had a total unfavorable impact of approximately 10 cents per share on the second quarter 2003 financial results compared with the prior year quarter. Schweitzer-Mauduit effective income tax rate was 12 percent for the second quarter compared with an effective income tax rate of 34.3 percent in the second-quarter of 2002. The lower effective income tax rate in the current year quarter was the result of a net deduction in valuation allowances related to deferred income tax assets due to the final settlement in the second-quarter of prior period tax audit assessments in the company's French operations, as well as changes in the estimates of our U.S. income tax situation.

This net reduction in valuation allowance reduced the provision for income taxes and increased net income during the second-quarter by $1.7 million or 11 cents per share. Excluding this reduction in valuation allowances the effective income tax rate for the quarter would have been 30.4 percent. The company's ongoing effective income tax rate is expected to be approximately 30 to 32 percent beginning in the third quarter of 2003. The unfavorable impact of currency exchange rate changes on second-quarter 2003 financial results was approximately offset by the lower effective quarterly income tax rate.

Net income for the quarter totaled $7.1 million, a decrease of $1.2 million or 14 percent from net income of $8.3 million in the second-quarter of 2002. Diluted earnings per share were 47 cents in the quarter compared with diluted earnings per share of 54 cents in the second-quarter of last year, a decline of 13 percent. The decline in both net income and diluted earnings per share was primarily caused by lower operating profit and unfavorable currency exchange rate changes partially offset by the lower effective income tax rate. Schweitzer-Mauduit continued its share repurchase program during the second-quarter with 107,600 shares of its common stock repurchased at a cost of $2.4 million.

This share repurchase activity was conducted under a Board of Directors authorization for the period January 1, 2003, through December 31, 2004, in an amount not to exceed $20 million. During the first six months of 2003, 221,700 shares of the company's common stock were repurchased at a total cost of $5.1 million. Earlier today Schweitzer-Mauduit announced a quarterly common stock dividend of 15 cents per share.

This dividend will be payable on September 15, 2003, to stockholders of record on August 18, 2003. The company has declared and paid quarterly dividends of 15 cents per share since the second-quarter of 1996. In light of the new tax law that provides more favorable income tax treatment for U.S. corporate dividends received by individuals Schweitzer-Mauduit is currently reviewing its share repurchase and dividend strategies. Capital spending for the quarter totaled $15.6 million compared with $5.2 million for the second-quarter of 2002.

Capital spending during the first half of 2003 was $27.0 million compared with $8.1 million for the first six months of last year. Capital spending in the current year quarter included $10.2 million for the construction of the new reconstituted tobacco leaf production line in France with 17.0 million spent on this project year-to-date. During the second-quarter excellent progress was made on the new reconstituted tobacco leaf project in France. In response to market conditions this project has been accelerated and startup is anticipated during the fourth quarter of this year.

Although pre-operating and startup costs will be incurred during the third and fourth quarters of 2003, these costs are expected to be more than offset by the profit contribution projected from additional production and sales volumes from the new production line. Capital spending for this project is expected to total approximately $60 million during 2003 with the total capital cost of this project estimated to be approximately $70 million. During the second-quarter the company's new cigarette paper manufacturing strategy was announced.

Approximately $15 million of capital spending will be incurred by the end of 2004 to upgrade cigarette paper manufacturing capabilities in both Brazil and the United States. This plan will permit us to better rationalize our worldwide production and sourcing of cigarette papers that will result in improved product quality and productivity on the affected paper machines.

Including the capital spending required to implement the new cigarette paper manufacturing strategy and to install the new reconstituted tobacco leaf production line in France, the company's total capital spending is expected to be approximately $90 million in 2003 and $35 million in 2004. As a result of increased capital spending, share repurchase activity and cash dividends paid to minority shareholders, the company's net debt increased during the quarter and the company's total debt to capital ratio increased from 20 percent at the end of the first quarter of 2003 to 24 percent at the end of the second-quarter.

The level of capital spending anticipated during the balance of 2003 will require increased borrowing under existing bank credit facilities. We anticipate being able to reduce our net debt during 2004. Schweitzer-Mauduit did not have significant production or sales of banded or print banded cigarette papers during the second-quarter of 2003. Cigarette manufacturers have not yet finalized their plans for the use of these products. We continue to work with our customers in their development of papers for reduced ignition propensity cigarettes.

In June 2003 the State of New York filed a notice of continuation to delay action on reduced ignition propensity cigarettes for up to six months. The State of New York has been in the process of reviewing comments received on the proposed fire safety standards for all cigarettes sold in that state. These standards were issued in December 2002. We understand that the New York Secretary of State is working to finalize the new fire safety standards for cigarettes as quickly as possible. New standards are expected to be issued prior to the end of this year.

These fire safety standards will be implemented 180 days after they are issued. As a result our expectation is that Schweitzer-Mauduit may experience increased sales of reduced ignition propensity cigarette papers beginning in these second or third quarter of next year. 2003 is a transition year for Schweitzer-Mauduit. We will be completing construction of the newly constituted tobacco leaf production line in France later this year, which is expected to result in a significant contribution to earnings beginning in 2004.

Increased sales of reduced ignition propensity cigarette papers are also expected in 2004 although this will continue to be dependent upon the implementation schedule of fire safety standards for cigarettes by governmental entities. The market for Schweitzer-Mauduit's products are expected to remain relatively stable. Increased tobacco related papers sales volumes are anticipated in several key markets.

Schweitzer-Mauduit will continue to face various cost pressures during the balance of 2003. Although the per ton cost of wood pulp is expected to deadline in the third quarter of this year from the second-quarter of the year, wood pulp costs are expected to remain above the prior year level during the balance of the year. The company's energy costs are also expected to continue to be higher in 2003 than in 2002. Significant increases have also been experienced in our pension and insurance expenses.

We typically have a lag in our ability to offset such cost increases in our product pricing. Despite these continuing cost increases we are expecting the company's financial results for the second half of 2003 to improve compared with the company's first-half performance. Selective price increases are being implemented in the third quarter and improved mill operations are expected.

The work stoppages experienced in France during the second-quarter are not expected to reoccur. Lower wood pulp costs are expected in the third quarter compared with the second-quarter of the year. Additional net profit contribution from the startup of the new reconstituted tobacco leaf production line in France will also benefit the second half of the year. Accordingly we are now expecting diluted earnings per share for 2003 to be in the range of $2.05 to $2.15. That concludes our planned comments. Operator, could you please open the phone lines for questions?

(CALLER INSTRUCTIONS). Ann Gurkin of Davenport.

With respect to your reduced ignition propensity papers are you picking up additional customers or getting more inquiries?

I don't think we have had a significant change in the number of customers that we have been working with, Ann. We continue to work with virtually all of the major suppliers in North America for either banded or print banded cigarette paper and those customers for the most part are waiting to see what the final regulations are for the reduced ignition propensity cigarettes before they will finalize their plans for their paper.

Okay. And France, can you comment on your inventory levels given the strikes?

I would say our inventory levels were reduced a little bit as a result of the strikes but nothing significant and certainly, absolutely no issues relative to customer service. I would say our inventories are still well within the range of what we consider reasonable for each of our countries.

Okay. Then you talked about recouping costs. Is it taking longer to pass through these higher prices to recoup costs or is it in line with historical trends.

I would say it is more in line with historical trends. Some customers, we do have pricing mechanisms that adjust for differences in things like pulp prices on a monthly or quarterly basis. With some customers the adjustments are after the end of a six-month period or some are on an annual basis. With some customers prices have to change by a certain amount before there are price adjustments. Typically when pulp prices or energy costs are declining we will retain some of that benefit and when they are increasing, as they have been recently, that is a negative factor until there is a certain equilibrium that is achieved.

Great, thanks very much.

Nick Booth (ph) of Wellington & Management.

On the banded paper, are you expecting only New York to be a player as of the next year, second and third quarter?

There are a couple of other states that have introduced similar bills as the State of New York. But as far as we are aware those have not gotten out of committee in different states and there does appear to be a willingness to wait to see what develops in New York and how that proceeds before other states would move. We are expecting that there will be a little bit of a wait-and-see attitude in the other states.

There is also movement though at this time in Canada. They do -- have proposed legislation to go to reduced ignition propensity cigarettes in that country as well, but again there is no time frame for that yet. So certainly initially we would expect any sales beginning the middle of next year, the second or third quarter, to be probably just for the State of New York and then see how the situation evolves after that.

What are the other states that are tracking New York?

Massachusetts and Rhode Island are two that we are aware of. I think Minnesota and California, I think are two also that have had some discussions but I do think they are as far along as some of the other states.

Secondly, there was a pretty good size dividend to minority shareholders. What was that?

Normally we will pay a dividend on an annual basis to the 28 percent minority shareholder of our LTR Industries subsidiary in France. There is a minority shareholder that owns 28 percent of that company. You will see their share of the profits in our cash-flow statement as a source of funds up on the top (technical difficulty). There was not a dividend paid in the year of 2002, which would have reflected 2003 earnings. So effectively in the first quarter of this year there was a dividend paid and also in the second-quarter of this year, which was a little bit of catch-up, so it really reflected two years of dividends.

Okay. Lastly, you mentioned in your comments contraband cigarettes in Brazil. Would those contraband cigarettes typically not be users of any of your products and likewise in the U.S., the non-compliant manufacturers, would they typically not be users of your papers?

In Brazil first of all, reports are that the contraband or the smuggled market for cigarettes could be as much as a third of the total market for cigarettes. So it really has become a significant issue in that country. Because of the high taxes in Brazil people are bringing cigarettes in from other countries. It appears that most of or a good quantity of those smuggled contraband cigarettes are coming from Uruguay or Paraguay. In part to fight that, a couple of years ago the Brazilian government under executive decree banned the export of any tobacco related products including cigarette papers to various countries outside of Brazil, including Paraguay and Uruguay. So to the extent that the cigarettes for the black market are coming in from those countries, we're not able to sell into those countries from our Brazilian operation.

Could the contraband cigarettes coming from Paraguay be production that has come from another country, or even from the U.S.?

We think that is a possibility but it also appears to be a case that there are small cigarette manufacturers that have begun production in Paraguay and Uruguay over the last few years to take advantage of the situation.

What about in the U.S. market, the non-signatories to the MSA agreement? Are they typically using your papers or not?

I would say that we are selling to various smaller cigarette manufacturers in the United States that are not one of the multinationals. I am not personally aware as far as whether, what their exact relationship is relative to the MSA payments. We do definitely have a corporate policy that we would sell to any suppliers of any kind of counterfeit or illegal cigarettes.

Thanks very much.

(CALLER INSTRUCTIONS). At this time there are no further questions. I will now turn the call back over to the management for closing remarks.

I would like to think everybody for taking the time to join us today. (technical difficulty)

(CONFERENCE CALL CONCLUDED)