Mativ Holdings Inc (MATV) 2003 Q3 法說會逐字稿

Good morning. My name is La tasha and I will be your conference facilitator today. At this time I would like to welcome everyone to the Schweitzer-Mauduit third 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. If you would like to ask a question during this time, simply press star, then the number one on your telephone key pad. If you would like to withdraw your question, press the pad pound key. Should anyone need assistance during the conference, pleas star then zero and an operator will assist you. As a reminder this call is being recorded today, October 30th, 2003. Thank you I would now like to introduce Mr. Paul Roberts, chief financial officer of Schweitzer-Mauduit international. Mr. Roberts, you may begin your conference.

Thank you, ma'am. Good morning. I'm Paul Roberts, the chief financial officer of Schweitzer-Mauduit International. With me is Wayne Grunewald, our corporate controller. Thank you for joining us for a review of our third 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 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, 2002. Prior to a detailed discussion of our financial results, I will review the highlights of the quarter. Diluted earnings per share were 70 cents compared with diluted earnings per share of 57-cents in the third quarter of 2002, an improvement of 23 percent. The improvement was the result of a lower effective income tax rate and a decline in interest expense, partially offset by lower other income. Net sales totaled 142.1 million dollars for the quarter, an increase of 7 percent from the prior year quarter. This increase was driven by changes in currency exchange rates and higher average selling prices partially offset by changes in sales volumes. The company's gross profit margin was 19.2 percent in the third quarter of 2003, compared with 20.6 percent in the prior year quarter. The lower gross profit margin reflected the impact of various cost pressures. Operating profit for the quarter was 15.2 million dollars, the strongest performance in a year, but essentially unchanged from the prior year quarter, which was the strongest quarter of 2002. Capital spending for the quarter totaled 34.2 million dollars, compared with 9.2 million dollars in capital spending during the third quarter of 2002. The current quarter spending included 28.2 million dollars related to the construction of a new reconstituted tobacco leaf construction line in France. Last week Schweitzer-Mauduit announced that one of its foreign subsidiaries will acquire a tobacco related papers manufacturing facility in Indonesia for a purchase price of approximately 8.5 million dollars.

I will now provide a more detailed review of our third quarter financial results and our current outlook for the balance of 2003 and for 2004. Net sales for the quarter totaled 142.1 million dollars, compared with 132.7 million dollars for the third quarter of 2002, a seven percent increase. Changes in currency exchange rates increased net sales by 8.8 million dollars, or 7 percent, compared with a third quarter of last year. The Euro was approximately 15 percent stronger versus the U.S. dollar for the quarter, while the Brazil real was six percent stronger versus the U.S. dollar. Somewhat higher average selling prices were experienced during the quarter, having a favorable two million dollar 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 slightly below the prior year quarter. Unit sales volumes for the third quarter increased by one percent, compared with the prior year quarter, but had an unfavorable 1.4 million dollar impact on the net sales comparison as a result of changes in the sales mix. Sales volumes in the United States improved by three 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 slightly below the prior year level, reflecting the continued decline in North American cigarette production. The domestic cigarette market does appear to be stabilizing, however, with growth of the deep discount segment moderating. According to the United States department of agriculture, export shipments of cigarettes declined by approximately six percent during the first seven months of 2003, the most recent period reported. Sales volumes for the French businesses increased by less than one percent from the prior year quarter with gains in the sale of tobacco related papers. Sales of reconstituted tobacco leaf products were slightly below the prior year level as a result of production capacity limitations. Sales volumes for our Brazil business declined by four percent for the quarter, compared with the third quarter of 2002. A decline was experienced in the sale of tobacco related papers reflecting the impact of weak economic conditions on cigarette consumption in Brazil and market penetration by contra band cigarettes. Lower sales of tobacco related papers in Brazil were partially off set by higher sales of commercial and industrial papers. However, the demand for and pricing of commercial and industrial paper remain under pressure in Brazil as a result of poor economic conditions in that country.

Gross profit was 27.3 million dollars in the third quarter of 2003, unchanged from the prior year quarter. The gross profit margin declined, however, from 20.6% in the third quarter of 2002 to 19.2% in the third quarter of this year. The change in gross profit margin was largely attributable to higher per ton wood pulp costs, increased purchase energy expenses and higher labor rates. In addition, during the third quarter of this year, pre-operating expenses totaling $500,000 were incurred related to the new reconstituted tobacco leaf line in France. Also, 800,000 in removable costs were recorded in the United States related to recently decommissioned underground store storage tanks. During the third quarter of 2002, the company incurred an unfavorable pretax expense of approximately two million dollars, related to a strike of its hourly employees at the Spotswood cigarette paper mill. The list price of northern bleach pulp averaged approximately $550 per metric ton during the third quarter in the United States compared with $510per metric ton in the third quarter of 2002, an 8 percent increase. The higher costs had an unfavorable impact on operating expenses of 1.3 million dollars compared with the third quarter of 2002. The list price of northern bleach soft wood Kraft pulp remained unchanged at $550 per metric ton. 2 per ton list price is expected to increase by approximately 15 to $20 per metric ton in the month of October. This anticipated pulp price increase reflects recent declines in manufacturers pulp inventories. Customer inventories are also reported to be low, and restocking could put further pressure on prices in the short term. Purchased energy costs increased by $ $600,000 compared with the third quarter of 2002. Higher energy costs were experienced in each of our business units, related primarily to higher natural gas and fuel oil costs. Non-manufacturing expenses increased by $100,000, or less than one percent during the quarter. Higher selling expenses in France were substantially offset by a decline in research and general expenses. Non-manufacturing expenses as a percent of net sales decreased from nine percent in the third quarter of 2002 to 8.5% in the current year quarter, reflecting the increase in net sales. Operating profit was 15.2 million dollars for the quarter, the strongest operating profit performance since the third quarter of last year when operating profit of15.3 million dollars was achieved. Operating profit return on sales was 10.7 percent for the third quarter, compared with 11.5 percent in the third quarter of last year. During the third quarter of 2003, operating profit improved in both the United States and France compared with the prior year quarter, but was lower in our Brazilian operations. Operating profit in the United States increased by $400,000 as a result of increased sales volumes, lower non-manufacturing expenses, and the absence of the prior year strike-related costs. These positive factors in the United States were partially offset by increased wood pulp purchased energy, and labor expenses and the underground storage tank removal costs.

Operating profit in France improved by $300,000, compared with the third quarter of 2002. This improvement was the result of increased production and sales volumes, higher average selling prices and improved mill operations, largely offset by increased wood pulp, purchased energy and labor expenses and pre-operating expenses where the reconstituted tobacco leaf production line. Operating profit in Brazil was 1.2 million dollars lower than the prior year quarter, attributable to lower production and sales volumes and higher wood pulp, purchased energy and material expenses. These negative factors were partially offset by higher average selling prices. Interest expense was $500,000 lower for the third quarter of 2003 versus the prior year quarter, as a result of lower average interest rates and capitalized interest related to major capital projects. Other income was $500,000 during the third quarter, compared with other income of one million dollar in the third quarter of 2002, an unfavorable change of $500,000. This difference was primarily attributable to a decline in foreign currency gains on non-local currency denominated assets and liabilities. Schweitzer-Mauduit effective income tax rate was 22.7 percent for the third quarter, compared with an effective income tax rate of 34.2 percent in the third quarter of 2002. The lower effective income tax rate in the current year quarter was primarily the result of a reduction in valuation allowances related to deferred income tax assets. This reduction was the result of implementing certain U.S. tax elections, including the adoption of first in-first out or FIFO inventory valuation for tax purposes., which changed the company's estimates of its ability to utilize foreign tax credit in the United States. The reduction in valuation allowances reduced the provision for income taxes, benefiting net income by one million dollars or seven cents per share during the quarter. The company's on-going effective income tax rate is expected to be approximately 30 percent in the fourth quarter of 2003 and in 2004. Net income for the quarter totaled 10.5 million dollars, an increase of 1.8 million dollars or 21 percent, diluted earnings per share were 70 cents in the quarter, compared with diluted earnings per share of 57-cents in the third quarter of 2002, an improvement of 23 percent.

The improvement in both net income and diluted earnings per share was primarily the result of the lower effective income tax rate and the decline in interest expense, partially offset by the reduction in other income. Last week Schweitzer-Mauduit announced that an agreement had been finalized and signed whereby one of our foreign subsidiaries will acquire PT Comsari Paper Indonesia, a tobacco papers manufacturer located in Madan, Indonesia. This acquisition has a purchase price of 8.5 million dollars, subject to working capital adjustments. It will be financed using existing bank credit lines. The transaction is subject to governmental approvals, and is expected to close within the next 90 days. Comsari is expected be an excellent fit within Schweitzer-Mauduit. Our French subsidiary, Papituit-Mauduit, was involved in the design and construction of the Comsari mill in the 1980's, has provided intermitent technical support over the years and currently licenses Comsari to use the PDM trademark in the marketing of Comsari products in Indonesia.. Comsari’s products are currently all sold to the tobacco industry within Indonesia, and they are a good complement to our product offerings. Comsari’s net sales for this year are expect to be approximately 6.5 million dollars. The acquisition of Comsari is consistent with our long term strategy for having production facilities in Asia, which is both a higher growth region for our products and a low-cost production area. The acquisition provides us with a manufacturing presence on a fourth continent and should significantly improve our ability to satisfy the needs of our customers in both Indonesia and the and the south east Asian market.

During the third quarter, excellent progress continued on the construction of the newly constituted tobacco leaf production line in France. This project has been accelerated in response to market conditions, and start-up is still expected to occur during the fourth quarter of this year. We will incur additional pre-operating and start-up costs in the fourth quarter, however, these costs are expected to be more than offset by the profit contribution projected from additional production and sales volumes. Capital spending for this new production line total 28.2 million dollars during the third quarter, and 45.2 million dollars year to date. Capital spending for this project totaled 4.3 million dollars during the first nine months of last year, with 3.9 million of that spending occurring during the third quarter. We are projecting capital spending for the reconstituted tobacco leaf production line to be approximately 60 million dollars this year, with a total capital costs of this project estimated to be approximately 70 million dollars. Work is also underway implementing the company's new cigarette paper manufacturing strategy that was announced during the second quarter of this year. In support of this strategy, 10.5 million dollars of capital will be spent to rebuild an idle cigarette paper machine and install supporting equipment at our Brazil operations. And 4.3 million dollars of capital spending will be used to rebuild a cigarette paper machine at our Spotswood paper mill in the United States. These capital projects are expected to be completed by the end of 2004 and should benefit future periods. We have spent approximately $500,000 on these two projects, thus far in 2003. 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 dollars this year, and 35 million dollars in 2004. As a result of increased capital spending, the company's net debt increased during the quarter and the company's total debt to capital ratio increased from 24 percent at the end of the second quarter to 25 percent at the end of the third quarter. The level of capital spending anticipated during the balance of 2003 will necessitate increased borrowings under existing bank credit facilities. We anticipate being able to reduce our net debt during 2004.

Schweitzer-Mauduit did not repurchase any shares of its common stock during the third quarter, although it share repurchase program remains in place. During the first nine months of the year, 221,700 shares of the company's common stocks were repurchased at a total cost of 5.1 million dollars. Earlier today Schweitzer-Mauduit announced a quarterly common stock dividend of 15 cents per share. This dividend will be payable on December 15, 2003, to stockholders of record on November 17, 2003. The company has declared and paid quarterly dividends of 15 cents per share since the second quarter of 1996. Schweitzer-Mauduit did not have significant production or sale of banded or print banded cigarette papers during the third quarter. 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. However, during the third quarter, the state of New York issued new proposed regulations on reduced ignition propensity cigarettes. The state set November 3, 2003 as the deadline to receive comments from interested parties on the revised regulations. The new proposed fire safety standards mentioned the use of banded cigarette paper and provided guidance on the spacing of such bands. After the comment period ends, the new standards are expected to be formally issued. The proposed fire safety standards call for implementation 180 days after they are issued issued. We understand that health Canada is also proceeding with plans to implement fire safety standards for cigarettes to be sold in that country. We understand that a proposed law may be introduced for comment in Canada during the first half of 2004. It is possible that such fire safety standards for cigarettes could be implemented by the end of 2004 in Canada. As a result of these developments, our expectation is that Schweitzer-Mauduit may experienced increased sale of reduced ignition propensity cigarette papers beginning in the second or third quarter of next year. 2003 is a transition year for Schweitzer-Mauduit. We will be completing construction of the new production line in France during the fourth quarter, which is expected to result in additional earnings beginning in 2004. The increased sales of reduced ignition propensity cigarette papers are also expected in 2004, although this will be dependent upon the implementation schedule of fire safety standards for cigarettes by various governmental entities. The new cigarette paper manufacturing strategy and the acquisition in Indonesia are also expected to benefit future periods.

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 costs pressures during the balance of 2003. The per ton cost of wood pulp is expected to increase in the fourth quarter, unfavorably impacting cost of products sold. 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. In our earnings press release earlier today, we reaffirmed our 2003 earnings guidance with diluted earnings per share for 2003 expected to be in the range of $2.05 to $2.15. We also anticipate diluted earnings per share for 2004 to increase by at least ten percent, compared with the range of earnings projected for 2003. Largely driven by the benefits of the new re-constituted tobacco leaf production capacity. That concludes our plant's comments, could you please open the phone lines for questions?

At this time I would like to remind everyone, please press star and the number one on your telephone key pad. If you are using a speaker phone, please pick up your handset before asking your question. We will pause for just a moment to compile the Q and A roster. The first question comes from the line of Ann Gurkin of Davenport.

Good morning.

Good morning, Ann.

A couple questions, what is the outlook for volume for RTL in the fourth quarter and for 2004? And how long do you plan to keep the third line running? Any change to that timeline?

We do expect to see an increase in volume, RTL volume in the fourth quarter because of the start-up of the new production line, absent that start up, our volume would be about the same because we are capacity limited. We would expect to have a benefit, probably for a portion of November, but primarily December operating that line. We have not given percentage changes though as far as how much we would expect the volume to change. Our current expectation is that we will continue to operate the two existing production lines as well as the new production line for a period of time until we are able to replenish inventory levels for both ourselves and our customers and are able to respond to the needs of the market. We will have to see how that goes, but our current thinking is we will probably continue to run the third or the smallest of the three machines probably for another four to six months into 2004.

Okay. Moving to your acquisition, can you talk a little bit about what you see as the growth rate for the markets, in Indonesia, Southeast Asia area, can you reveal, a little bit, the capacity for the facility you bought? Any need for capital spending? Give us an update there.

The facility that we will be buying -- again, we expect to close in about 90 days is a single machine mill that -- it has a single paper machine that has annual capacity of about 3200 metric tons. The mill has about 200 employees and we would expect net sales to be in the range of about 6 and a half million dollars this year. We will be expending capital funds over the next couple years to upgrade the facilities in Indonesia to improve the productivity and the quality of product, of the product manufactured there. Our expectation is that the Azean region, south east Asia, Indonesia, has growth potential in the range of three to four percent a year. And we believe that we will be able to increase the production off of that mill over the next several years, although we haven't given guidance as far as how much of an increase we believe that there is a potential for some meaningful increases in the productivity of the existing facility.

Is any of the capital spending in the numbers you just gave out, the 35-million?

The capital spending is not included in that. We will not include that until we have completed the acquisition, but, again, relative to the capital spending of the total corporation, it would be relatively small.

Okay. Then the earnings, projected earnings, growth rate of at least ten percent for 2004, does that include any pick up from the sale of fire safe paper? What is in that number?

We are anticipating some benefit in the sale of reduced ignition propensity papers starting in the third and fourth quarter of next year is our expectation, so there is a small positive built in relative to that.

Okay. And then can you just review your priorities of cash flow again looking out at the next couple years?

Certainly our first priority is the complete the capital spending projects that we have underway, the one in France, as well as the implementation of our new tobacco paper manufacturing strategy. We would expect our capital spending to return to more normal levels, once we have those projects behind us. We would continue to look for possible acquisitions such as the one in Indonesia, if there is an opportunity for us. We do continue to have discussions with the state tobacco monopoly in China on the possibility of a joint venture there. If successful, with those negotiations, that would be a high priority for us. Our first priority would be to continue to fund growth opportunities, either internally or to a joint venture, or if there were other acquisition opportunities. I think once we have better clarity on what our capital spending requirements would be, increased dividend in the future or additional share repurchase would also be priorities for us. We also want to maintain debt to capital at a reasonable level, but, again, we believe that we have got some cushion there.

All right. Thanks a lot.

Okay, Ann.

Your next question comes from Kerry OConnor of Peter Creek Management.

Hello, how are you? Give us an estimate of the pre-operating and start up costs you’ll incur in 4Q on RTL? About half a million for just pre-operating this quarter, right?

Right. We have not quantified that publicly. We would expect it to be more than the 500,000 we incurred this quarter because there will be start-up costs associated with that, but those costs will be off set by the additional contribution.

Okay. Secondly, this sounds like a change in Canada, there is more activity there on fire safe than in the past? Is that an accurate read of that? It sounds like it would could be closer than we thought?

I think this has been, from what we have been able to determine, this is a priority in health Canada. They seem very interested in that at this point, the information we have is based upon discussions that either we have had directly or intermediaries have had directly with health Canada, but it is something that they appear to be taking a very serious look at.

Okay. One other question on the -- there is a lot of discussion about 5% sort of tax rate on repatriated profit. Give us an idea, what would that mean for you guys and whether you would be likely to take advantage of that?

We would have to certainly understand what the specifics of the regulations are. We do have quite a bit of understood repatriated earnings that have accumulated in foreign jurisdictions, and a major reason for that is that in France, in particular, we had net operating loss carry forwards so quite a bit of the earnings in France have been sheltered from taxes, so if we were to bring those back, we would incur some tax penalties. We would look at that and we may well bring cash back if we had corporate needs for it. Up to this point, our cash management strategies have provided adequate cash flow coming from other dividends, coming back to the United States.

Okay. One last thing, it looks like about ten million bucks of capital next year on your new strategy, the equipment in Brazil and Spotswood and your total cap x is 35, does that suggest about 20m as an ongoing level of capital expenditures, x, projects like that?

Probably in the 20 to 25 million dollars range.

Barring any projects that come up in the future, is that a starting point for 05?

Yes. It is a good starting point, as you say, absent other projects that I call strategic in nature.

Thank you.

Again, if you would like to ask a question, please press star, then the number one on your telephone key pad. We will pause for just a moment to compile the Q and A roster. At this time, there are no further questions. I will now turn the call back over to manage m for closing comments.

I would just like to thank everyone for taking the time to join us today. Good-bye.

Thank you for participating in today's conference. You may now disconnect.