Mativ Holdings Inc (MATV) 2003 Q4 法說會逐字稿

Good morning. My name is Christie (ph) and I will be your conference facilitator today. At this time, I would like to welcome everyone to the fourth-quarter earnings release conference call. (OPERATOR INSTRUCTIONS). Mr. Roberts, you may begin your conference.

Thank you, Christie. 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 fourth-quarter 2003 financial results. After discussing our results, we will open the phone line for questions. If for any reason you did not receive our earnings press release issued earlier today, you may access it on our web site -- 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 10-K for the year ending December 31st, 2002.

During the fourth quarter of 2003, the company's U.S. business unit changed from the LIFO to the FIFO inventory evaluation method for financial reporting purposes. The financial results for the quarter and full year, for both 2003 and 2002, reflect this change in the method of accounting for inventories, as if the company's U.S. business unit had been on FIFO for all periods presented.

Prior to a detailed discussion of our financial results, I will review the highlights of the quarter. Diluted earnings per share were 61 cents, compared with diluted earnings per share of 47 cents in the fourth quarter of 2002, an improvement of 30 percent. The improvement in diluted earnings per share was the result of increased sales and production volumes and higher average selling prices. These positive factors were partially offset by continued raw materials, energy and other cost pressures.

Net sales totaled $147.4 million for the quarter -- an increased of 22 percent from the prior quarter. This increase was caused by changes in currency exchange rates, increased sales volumes, and higher average selling prices.

The company's gross profit margin was 20.0 percent in the fourth quarter of 2003, compared with 19.0 percent in the prior year quarter. The improved gross profit margin reflected the benefit of increased production and sales volumes and higher average selling prices.

Operating profit for the quarter was $14 million -- a $3.8 million, or 37 percent, improvement from the prior year. Operating profit in the United States was $5.3 million more than in the fourth quarter of 2002, as a result of increased production and sales volumes, favorable fixed cost absorption, and higher average selling prices. During the fourth quarter of 2002, the company's U.S. operations were unfavorably impacted by unplanned production down time.

Capital spending for the quarter totaled $30.8 million, compared with $13 million in capital spending during the fourth quarter of 2002. The current quarter's spending included $17.8 million related to the construction of the new reconstituted tobacco leaf, or RTL production line in France.

During the fourth quarter, the new RTL production line began operation four months earlier than originally planned. This project had an unfavorable impact on the fourth quarter financial results, as pre-operating and startup costs totally $900,000 exceeded the profit contribution from the added RTL sales volumes related to the capacity expansion.

In December 2003, the state of New York announced the adoption of a fire safety standard for cigarettes that becomes effective June 28, 2004, and requires all cigarettes sold in that state to have reduced ignition propensity properties. Our expectation is that the state of New York fire safety standard will result in increased sales of reduced ignition propensity cigarette papers by Schweitzer-Mauduit during 2004.

(technical difficulty)

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the conference will resume momentarily. Thank you.

Sir, you may resume with your conference.

Thank you, Christie. I understand that there was technical difficulty, and I was cut off. I am not sure of the exact point I was in, in going through this. I think what I will begin with is with starting with the detailed review of our fourth-quarter financial results and our current outlook for 2004, and anything I may have lost in the summary, I will pick up in the detailed discussion.

So, I will begin with the detailed review of our fourth-quarter financials. Our net sales for the quarter did total $147.4 million -- an increase of $26.6 million, or 22 percent, compared with the fourth quarter of 2002. Changes in currency exchange rates increased net sales by $12.6 million, or 10 percent, compared with the fourth quarter of 2002. The euro was approximately 19 percent stronger versus the U.S. dollar, while the Brazilian real was approximately 27 percent stronger versus the dollar.

Unit sales volumes for the quarter increased by 7 percent, compared with the prior year quarter, having a favorable $8 million impact on the net sales comparison.

Sales volumes in the United States improved by 15 percent. This gain reflected increased sales of both tobacco-related and commercial and industrial papers. Tobacco-related paper sales volumes in the U.S. business unit, in the fourth quarter of 2002, were unfavorably affected by significant purchase cutbacks by our major North American customers.

Compared with the fourth quarter of 2002, the fundamentals of the U.S. cigarette market appeared to have stabilized. Overall, domestic cigarette consumption is projected to have declined approximately 1 to 2 percent during 2003. The premium and deep discount segments appear to have maintained their respective marketshares in recent months.

According to the United States Department of Agriculture, export shipments of cigarettes declined by approximately 7 percent during the first ten months of 2003 -- the most recent period reported.

Sales volumes in our Brazilian business improved by 10 percent for the quarter, compared with 2002. This improvement was primarily in the sale of commercial and industrial papers, although tobacco-related papers sales volumes did improved marginally. The sales volumes of our Brazilian business unit continued to reflect the impact of weak economic conditions on cigarette consumption in Brazil, and market penetration by contraband cigarettes. The demand for, and pricing of, commercial and industrial papers in Brazil also remain under pressure, as the result of poor economic conditions in that country.

Sales volumes for the French businesses increased by 3 percent, compared with the prior-year quarter, with gains in the sale of tobacco-related papers and reconstituted tobacco leaf products. Future French sales volumes are expected to benefit from the new reconstituted tobacco leaf production capacity that began operation during the quarter.

Higher average selling prices were experienced, having a favorable $6 million impact on the quarterly net sales comparison. Higher average selling prices were experienced in each of our business units, reflecting an improved mix of products sold and contractual price adjustments related to increased per-ton wood pulp costs.

Gross profit was $29.5 million in the quarter, an improvement of $6.5 million, or 28 percent from the prior-year quarter. The gross profit margin was 20.0 percent for the quarter, an improvement of 100 basis points, compared with the fourth quarter of 2002.

The change in gross profit was attributable to increased sales in production volumes, favorable fixed cost absorption, and higher average selling prices. These positive factors were partially offset by increased wood pulp, purchased energy, and labor expenses.

The list price of northern bleached softwood craft (ph) pulp -- a bellwether pulp grade -- average approximately $575 per metric ton in the United States during the quarter, compared with $490 per metric ton in the fourth quarter of 2002 -- a 17 percent increase. They higher per-ton wood pulp costs had an unfavorable impact on operating expenses of $1.2 million, compared with the prior-year quarter.

The list price of northern bleached softwood craft pulp increased from $550 per metric ton in September to $565 in October, and $580 in November. The per-ton list price has remained at 580 through January, although pricing could increase again in March or April, as economic and seasonal factors are expected to tighten the market pulp supply-and-demand imbalance.

Purchased energy costs increased by $500,000 compared with the fourth quarter of 2002. Higher energy costs were experienced in each of our business units, related primarily to higher natural gas and purchased electricity costs.

Non-manufacturing expenses increased by $2.7 million during the quarter, primarily in selling, and general expenses. Higher non-manufacturing expenses were experienced in both France and Brazil, primarily as a result of strengthening in their local currencies versus the U.S. dollar, and higher compensation and benefit expenses.

Non-manufacturing expenses, as a percent of sales, were 10.5 percent in the current year quarter -- approximately at the level of the prior-year quarter.

Operating profit was $14 million for the quarter -- an improvement of $3.8 million, or 37 percent, compared with the fourth quarter of 2002. Operating profit return on sales was 9.5 percent, compared with 8.4 percent in the fourth quarter of 2002.

In the fourth quarter, operating profit improved in both the United States and France, compared with the prior-year quarter, and was lower in our Brazilian operations. Operating profit in the U.S. business unit was $1.9 million in the fourth quarter, compared with an operating loss of $3.4 million in the fourth quarter of 2002 -- an improvement of $5.3 million.

The operating results in the U.S. business unit in the fourth quarter of 2002 were unfavorably affected by unplanned down time that caused lower production volumes and unabsorbed fixed costs, as our major customers reduced their purchases from the company.

The improved operating performance in 2003 reflected increased production and sales volumes, in part, due to a planned inventory build, favorable fixed cost absorption, and higher average selling prices. These favorable factors were partially offset by increased wood pulp, purchased energy, and labor and benefit expenses.

Operating profit in France of $13.4 million improved by $500,000, compared with the fourth quarter of 2002. This improvement was the result of increased production and sales volumes and higher average selling prices, largely offset by increased wood pulp, purchased energy, labor, and non-manufacturing expenses. In addition, during the fourth quarter of 2003, pre-operating and start-up costs totaling $900,000 were incurred, related to the new RTL production line.

Operating profit in Brazil of $700,000 was $1.8 million lower than the prior-year quarter -- attributable to higher wood pulp, purchased energy, materials and non-manufacturing expenses, as well as the unfavorable impact of changes in currency exchange rates. These negative factors were partially offset by increased production and sales volumes.

Other income was $600,000, unfavorable compared with the fourth quarter of 2002. This change was primarily attributable to a decline in interest income as a result of lower cash balances.

Schweitzer-Mauduit's effective income tax rate was 21.1 percent for the fourth quarter, compared with an effective income tax rate of 16.8 percent in the fourth quarter of 2002. The effective income tax rate in the current-year quarter reflected the company's expected increased ability to utilize foreign tax credits in the United States, as improved expectations of domestic taxable income allowed the company to reverse valuation allowances related to tax credits. The effective income tax rate in the fourth quarter of 2002 was lowered by a net reduction in valuation allowances related to deferred income tax assets, primarily due to favorable adjustments from tax audits in the company's French operations.

Net income for the quarter totaled $9.3 million -- an increase of $2.3 million, or 33 percent, from net income of $7 million in the fourth quarter of 2002. Diluted earnings per share were 61 cents, compared with diluted earnings per share of 47 cents in the fourth quarter of 2002 -- a 30 percent improvement. The improvement in both net income and diluted earnings per share were primarily the result of increase in operating profits, partially offset by lower other income and the higher effective income tax rate.

The financial results that I just reviewed reflect the change in the method of accounting for certain inventories in the United States from last-in-first-out, or LIFO, to first-in-first-out, or FIFO, for financial reporting purposes -- as if our U.S. business unit had been on FIFO for all periods presented.

As previously communicated, during the third quarter of 2003, the company made an income tax election to convert from LIFO to FIFO inventory valuation for U.S. income tax purposes, effective January 1, 2002. This election helped the company avoid unfavorable tax consequences on its 2002 U.S. federal income tax return, and is expected to improve the company's domestic tax position in 2003, 2004 and 2005.

During the quarter, the decision was also made to change to the FIFO inventory valuation method for financial reporting purposes. This change provides consistency between tax and financial accounting in the United States, and is also more consistent with the majority of the company's inventory accounting, since our foreign subsidiaries do not utilize LIFO inventory valuation.

This change will also reduce the required administrative burden, while still accurately reflecting the economic substance of the company's transactions. The implementation of the LIFO to FIFO accounting change during the fourth quarter required the retroactively restatement of all periods presented. The impact of the accounting change is provided in a note to our unaudited financial summaries included in our earnings press release.

For the years 1999 through 2002, the cumulative impact of the accounting change on diluted net income per share was a net 2 cents. This restatement of the financial results did increase reported diluted earnings per share for full-year 2002 by 3 cents per share, and for the first nine months of 2003, by 7 cents per share.

During the fourth quarter, the new RTL production line began operation at the company's LTRI subsidiary in Spay, France. Start-up was four months earlier than originally planned, and was accelerated in response to market conditions. The production rate of the new line is increasing at anticipated levels, as we progress to an expected six-month start-up curve. End-of-curve production rates are expected to be achieved during the second quarter of this year.

We also expect to cease operation of the smallest of the three RTL production lines in France during the second quarter, as the new line ramps up production, and until it is required by future increased demand. The new RTL production line is now expected to cost a total of approximately $78 million. This total is higher than previously projected, primarily as a result of the strengthening of the euro versus the U.S. dollar.

Capital spending for the new RTL production line totaled $17.8 million during the quarter, and was $63 million for full-year 2003. Capital spending for this project totaled $8.9 million for full-year 2002, with 4.6 million of that spending occurring during the fourth quarter. Approximately $6 million will be spent during 2004 to finalize the project.

Work is under way implementing the company's new cigarette paper manufacturing strategy that was announced during the second quarter of 2003. In support of this strategy, $10.5 million of capital will be spent to rebuild an idle cigarette paper machine and install supporting equipment at our Brazilian operations. And $4.3 million will be spent 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 spent $2.9 million on these two projects in 2003.

As a result of the high level of capital spending, the company's net debt increased, and the company's total debt-to-capital ratio changed from 25 percent at the end of the third quarter to 27 percent at the end of the fourth quarter. The increase in net debt required increased borrowings under existing bank credit facilities.

During October 2003, Schweitzer-Mauduit announced that an agreement had been reached whereby one of our foreign subsidiaries will require P.T. Kimsari paper Indonesia, a tobacco-related papers manufacturer in Indonesia. This acquisition has a purchase price of $8.5 million, subject to working capital adjustments. It will be financed using existing bank credit lines. The transaction is subject to Indonesian governmental approval, which is expected shortly. The acquisition is expected to close during the first quarter.

Schweitzer-Mauduit did not repurchase any shares of its common stock during the fourth quarter, although our share repurchase program remains in place. During 2003, 221,700 shares of our common stock 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, payable on March 15, 2004 to stockholders of record on February 17th, 2004. 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 2003. We continue to work with our customers in their development of reduced ignition propensity cigarettes.

On December 31st, 2003 the state of New York announced the adoption of final regulations for reduced ignition propensity cigarettes. The fire safety standard requires that all cigarettes sold in the state of New York, as of June 28, 2004, have reduced ignition propensity properties. The regulations do contain a provision that allows wholesalers and retailers to transition their existing inventories. The final fire safety regulations mention the use of banded cigarette paper and provide guidance on the location of such bands.

As the result of the implementation of the new fire safety standard in the state of New York, our expectation is that Schweitzer-Mauduit will have increased sales of reduced ignition propensity cigarette papers during 2004. These reduced ignition propensity papers sell for a higher price than the conventional cigarette papers they replace, and are expected to add a positive impact on the company's financial results.

Since the state of New York only represents approximately 10 percent of U.S. cigarette consumption, and new regulations will only be in effect for one-half of 2004, the positive impact on the company's financial results is not expected to be significant this year.

Schweitzer-Mauduit is positioned for future earnings improvement. The increase in reconstituted tobacco leaf production capacity, the new cigarette paper manufacturing strategy, the acquisition in Indonesia, and anticipated increased sales of reduced ignition propensity papers are expected to benefit 2004 and subsequent periods.

The markets for our products are expected to remain relatively stable. Increased tobacco-related paper sales volumes are anticipated in several key markets. Schweitzer-Mauduit expects to continue to face various cost pressures during 2004. The per-ton cost of wood pulp is expected to increase in either March or April of this year, unfavorably impacting cost of products sold. Higher labor and employee benefit costs are also expected.

The company's effective income tax rate in 2004 is expected to be higher than in 2003, at approximately 30 percent. The company is also projecting capital spending for 2004 to be approximately $42 million, and approximately $30 million in 2005.

Schweitzer-Mauduit is currently expecting diluted earnings per share for 2004 to increase by approximately 5 to 10 percent, and to be in the range of $2.40 to $2.50.

Christie, that concludes our planned comments. Could you please open the phone lines for questions?

(OPERATOR INSTRUCTIONS). Ann Gurkin.

Good morning. I'm wondering if you could talk a little bit about the use of cash flow in 2004, maybe to return value to shareholders through dividend and share repurchases versus maybe the use of cash targeted for acquisitions or reinvesting in the business?

Well, we will be using cash in 2004, first of all, to complete the capital programs that I discussed -- about $42 million will be incurring, about 8.5 million, or spending about $8.5 million for the acquisition in Indonesia. And, our first priority for cash flow would be exactly those two types of things -- either growing the business internally, or a complementary acquisition -- something would fit our core businesses. We will be maintaining our dividend during 2004. We expect to maintain the dividend, and will look at share repurchase as an alternative, depending upon the stock price. We have not made any decision at this point, relative to a possible change in the dividend level.

Okay. And then, the increase in operating profit in the U.S. business in the fourth quarter -- part of that, I think, was due to planned inventory build. Can you break out the percentage of that operating profit that resulted from that planned inventory build?

We don't break out that information separately, Ann. You are correct in that the fourth quarter of 2003 did benefit from significantly increased production schedules, in part because of unplanned down time the prior year, and in part because we are building inventories because we will be taking one of our larger cigarette paper machines down. We would expect to see a little bit of a negative in the first half of 2004 in the U.S. operations, as we bring the inventory down and have the one machine down for conversion.

Okay. And then, the improvement that you're looking for in earnings in 2004 versus 2003. You outlined a lot of the reasons -- increased reconstituted tobacco, leaf production capacity, new cigarette manufacturing strategy, etc. Would you care to break out the percentage of contribution from each one of those factors to the higher projected earnings?

We typically don't break out the factors. But, I think, in terms of significance -- probably the most significant item would be the reconstituted tobacco capacity being added in France. Not only the added capacity, the added volume. But we will not have the start-up cost to the extent that we had in 2003. So, that would be the primary contributor to improved profitability in 2004.

The benefit of the cigarette paper manufacturing strategy will be much later in the year, and most of that will benefit really 2005, going forward.

Okay. And then, last, any update on additional legislation for reduced ignition propensity cigarette paper?

We have seen reports, apparently in response to the state of New York, finalizing their standards of several additional states considering legislation. But, again, there is nothing that is definite in any of the other states. But, we understand that there are probably in the range of half a dozen states that are considering similar legislation, as well as Canada. But nothing definite at this point. Our own expectation is that there will probably be people observing to see how things work out in the state of New York before there would be a lot of additional change.

Okay, can you tell me what the states are? It was Rhode Island, Massachusetts -- is that right?

I don't have them here, Ann, off-hand.

That's it. Thank you very much.

Mark Anderson.

Congratulations. Just wanted to tie up some loose ends here on the numbers. Just, backing into how RTL performed. It looked like it was down, year-over-year. Just given the minority interest was down, year-over-year, I would have expected it to be higher even with the euro appreciation as well. Can you maybe explain to me why it was down? Is it just absorption with the new facility? Or, what really caused it to fall?

Well, we did start up the new production line in the fourth quarter, Mark. But our start-up costs did exceed the additional profit contribution from the additional volume that came off of that machine. We had start-up cost of about $900,000. And, the profit contribution was probably a bit less than half of that amount from the additional volume. So, that would probably be the major reason why there was a change.

Okay. And, just real quickly, going back to what Ann asked about. You highlighted what you thought the major contributors to profit growth next year would be. I actually missed that; I was just running out of the room for a second. Could you restate that, please?

Sure. The primary contributor, as I said, is going to be the benefits coming from the new RTL expansion in France.

Sure.

But, we won't have as much, in terms of start-up and pre-operating costs, as we had in 2004. We totaled about $2.3 million in pre-op and start-up costs for the full year. We will have a little bit in the first quarter, but certainly nothing to that extent. And we will have the benefit of the added volume. That will be the primary contributor to the operating profit improvement. We do expect to benefit a little bit from some sales of reduced ignition propensity papers in North America. We will be benefiting from the new cigarette paper manufacturing strategy, although that benefit will primarily be later in the year.

So, really next year all the profit growth will be driven by some of the cost initiatives you've got domestically, plus fully ramping up RTL? And then, if we want to be aggressively, we can think that fire safe paper is an '04 rather -- not an '04, more of an '05 -- earnings contributor?

Since New York is only about 10 percent of U.S. cigarette consumption, and it will be in effect for about half of the year, we would expect that perhaps 5 percent of our domestic cigarette paper sales would be the reduced ignition propensity papers. That amount should roughly double the following year, assuming no other states have gone prior to that time. But, again, we would have to see.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS). There are no further questions at this time, sir.

Okay. Thank you, Christie and I would like to thank everyone for taking the time to join us today. Goodbye.

Thank you. This concludes your conference. You may now disconnect.