Mativ Holdings Inc (MATV) 2004 Q1 法說會逐字稿

Good afternoon. My name is Meredith and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Schweitzer-Mauduit International first quarter 2004 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. 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 pound key. Thank you.

Mr. Roberts, you may begin your conference.

Thank you, Meredith. Good afternoon. I'm Paul Roberts, the CFO of Schweitzer-Mauduit International. With me is Wayne Grunewald, our Corporate Controller. Thank you for joining us for our review of our first quarter 2004 financial results.

Our conference call today is later in the day than is typical, because of our annual stockholders meeting and the board of directors meeting held earlier today. If for any reason you did not receive our earnings press release, you may access it on our Web site, www.Schweitzer-Mauduit.com. Or call 800-514-0186, and a copy will be faxed or e-mailed to you. Today's conference call will also be available on our Web site.

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 our Securities and Exchange Commission reports, including the our annual report on Form 10-K for the year ending December 31, 2003.

Prior to a detailed discussion of our financial results, I will review the highlights of the quarter.

Diluted earnings per share were 42 cents, compared with diluted earnings per share of 45 cents in the first quarter of 2003, a decline of 7%.

Earnings for the current year quarter were unfavorably impacted by mill operations and increases in wood pulp, labor, nonmanufacturing, and interest expense, partially offset by increased sales volumes, higher average selling prices, and a lower effective income tax rate. Changes in currency exchange rates also had an unfavorable impact.

Net sales totaled $159.9 million, an increase of 18% from the prior year 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 18.2% in the first quarter, compared with 19.1% in the prior year quarter. The lower gross profit margin reflected the impact of increased costs, and unfavorable mill operations. Operating profit was $12.2 million, a decline of $400,000 or 3%. Capital spending totaled $8 million, compared with $11.4 million during the first quarter of 2003.

In February, we announced the acquisition of a specialty paper manufacturer located in Indonesia. Schweitzer-Mauduit's first quarter 2004 financial results include the February and March results of the Indonesian operation.

The company has begun limited production and commercial sales of lower ignition propensity cigarette papers. Momentum appears to be building for the implementation of fire safety standards for cigarettes.

The new reconstituted tobacco leaf production line in France, which began operation during the fourth quarter of 2003, continued to make excellent progress. This new production line is expected to be the major contributor to increased operating profit this year.

I will now provide a more detailed discussion of our first quarter financial results and our outlook for the balance of the year.

Net sales at $159.9 million were an increase of $24.2 million, or 18% compared with the first quarter of 2003. Changes in currency exchange rates increased net sales by $12.1 million or 9%, compared with the first quarter of 2003. The Euro was approximately 16% stronger versus the U.S. dollar, while the Brazilian real was approximately 21% stronger versus the U.S. dollar.

Unit sales volumes increased by 9% compared with last year, having a favorable $7.1 million impact on the net sales comparison. Excluding sales of the recently-acquired Indonesian operation, sales volumes increased by 7%.

Sales volumes for the French business segment increased by 14% year over year, primarily as a result of increased reconstituted tobacco leaf or RTL sales, supported by the new RTL production line. Excluding sales volumes of the Indonesian operation, which is included in the French business segment reporting, the increase in French sales volumes was 11%. French sales volumes are expected to continue to benefit from the new RTL production capacity.

Sales volumes in our Brazilian business improved by 7%, compared with the first quarter of 2003. This improvement was caused by increased sales of both tobacco-related and commercial and industrial papers.

Sales volumes in the United States declined by 3%. This decline was attributable to lower sales of both tobacco-related and commercial and industrial papers. We estimate that shipments of U.S.-produced cigarettes decreased by approximately 4% in full-year 2003. For full-year 2004, we are anticipating that U.S. cigarette production will decrease by approximately 2-3%. According to the United States Department of Agriculture, export shipments of cigarettes declined by approximately 5% during 2003.

Higher average selling prices were experienced during the first quarter, having a favorable $5 million impact on the net sales comparison. The improvement in average selling prices was primarily in the U.S. business, reflecting an improved mix of products sold, and contractual price adjustments related to increased per ton wood pulp costs. Somewhat higher average selling prices were also experienced in the French businesses.

Gross profit was $29.1 million, an improvement of $3.2 million or 12% from the prior year quarter. The gross profit margin however, declined from 19.1% in the first quarter of 2003, to 18.2% in the current year quarter. The increase in gross profit was attributable to increased sales and production volumes and the higher average selling prices.

These positive factors were partially offset by unfavorable mill operations and increased wood pulp and labor expenses that resulted in the decline in the gross profit margin. The list price of northern bleached softwood Kraft pulp, a bellwether pulp grade, averaged approximately $600 per metric ton in the United States during the quarter, compared to $505 per metric ton in the first quarter of 2003, a 19% decrease.

Year over year, the higher per ton wood pulp cost had an unfavorable impact on operating expenses of $1.3 million in the first quarter. The list price of northern bleached softwood Kraft pulp increased from $580 per metric ton in January to $600 in February, and $620 in March. An additional $30 per metric ton increase occurred in April, which brings the list price to $650 per metric ton. Pulp prices are expected to continue to increase during 2004, as economic and seasonal factors are expected to tighten the market pulp supply and demand balance.

Nonmanufacturing expenses increased by $3.6 million, with increases in selling, research, and general expenses. Higher nonmanufacturing expenses were experienced in France and Brazil, resulting from the strengthening of their local currencies versus the U.S. dollar, and higher compensation and benefit expenses.

Increased selling expenses were incurred in the French operations in support of the increased RTL sales volumes. Nonmanufacturing expenses in France also included $900,000 that were incurred to close an administrative and sales office in Paris. An additional $300,000 of closure-related expenses are expected in the second quarter. The closure of the Paris office is expected to benefit nonmanufacturing costs beginning in the second half of this year.

Nonmanufacturing expenses as a percent of net sales were 10.6% in the current year quarter, compared with 9.8% in the first quarter of last year.

Operating profit was $12.2 million, a decline of $400,000, or 3% compared with the first quarter of 2003, as the increase in nonmanufacturing expenses more than offset the increase in gross profit. Operating profit return on sales was 7.6%, compared with 9.3% in the first quarter of last year.

In the first quarter, increased operating profit in the French segment was more than offset by lower operating profit in Brazil, and the United States. Operating profit in the French segment was $13.9 million, a $500,000 improvement over last year. This improvement was the result of increased sales and production volumes, and somewhat higher average selling prices, partially offset by increased wood pulp, labor, and nonmanufacturing expenses, including the Paris office closure costs of $900,000. Startup expenses related to the new RTL production line totaled $400,000. The unfavorable impact of changes in currency exchange rates, also reduced French operating profit by $400,000.

Operating profit in Brazil declined by $800,000, compared with the first quarter of 2003, as a result of an unfavorable $800,000 impact of changes in currency exchange rates. The benefits of increased production and sales volumes were offset by higher purchased energy and labor expenses.

The U.S. business unit incurred an operating loss of $1.1 million, which was $100,000 more than the operating loss incurred in the prior year quarter. The decline in profitability in the United States was the result of unfavorable mill operations, and increased wood pulp, purchased energy, labor, and employee benefit expenses, partially offset by increased selling prices, and an improved mix of products sold.

U.S. mill operations were significantly unfavorable compared with the prior year. Operating inefficiencies were experienced at the Spotswood mill, following downsizing of the mill from a four-paper machine to a three-paper machine operation, which was implemented as part of the cigarette paper manufacturing strategy that was announced last year.

Mill operating expenses were also unfavorably affected by unusual winter weather conditions that resulted in the freezing of a mill water intake line, causing unplanned production downtime and increased machine waste. U.S. mill operations did improve during March with the improvement continuing in April.

Net interest expense increased by $500,000, caused by an increase in outstanding debt required to support the company's recent capital spending and increased working capital requirements. Higher net interest expense will continue to have an unfavorable earnings impact for the balance of the year.

Schweitzer-Mauduit's effective income tax rate was 26% for the first quarter, compared with an effective rate of 33% in the first quarter of last year. The lower effective income tax rate reflected a change in the mix of earnings by business, and the impact of a restructuring of the company's foreign operations implemented in the second quarter of last year. The company's effective income tax rate is expected to be approximately 28% for full-year 2004. The effective income tax rate for full-year 2003 was 23%.

Minority interest in the earnings of subsidiaries was $1.8 million, an increase of $500,000 over the prior year quarter, as a result of improved earnings in our French reconstituted tobacco leaf business, which has a minority owner.

Net income totaled $6.5 million, a decrease of $400,000 or 6% from net income of $6.9 million in the first quarter of 2003. Diluted earnings per share were 42 cents, compared with diluted earnings per share of 45 cents in the first quarter of 2003, a decline of 7%.

The decline in both net income and diluted earnings per share was primarily caused by the lower operating profit in Brazil, and higher net interest expense and minority earnings, partially offset by the lower effective income tax rate.

Capital spending totaled $8 million, compared with $11.4 million for the first quarter of 2003. Capital spending in 2004 included $2 million for the construction of the new RTL production line, compared with $6.8 million during the first quarter of 2003.

The new RTL production line in France began operation in the fourth quarter of last year, and continues to make excellent progress. The production rate of the new line is increasing monthly, and we anticipate being at end of curb production rates by the middle of this year.

The implementation of the company's new cigarette paper manufacturing strategy, that was announced during the second quarter of last year, continued during the first quarter. In support of this strategy, $12.3 million is being spent to install a new cigarette paper machine and supporting equipment at our Brazilian operation, and $4.3 million is being 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 $1.8 million on these two capital projects during the first quarter.

Schweitzer-Mauduit is expecting total capital spending for the full year to be approximately $42 million, and in 2005, to total approximately $30 million.

In February, Schweitzer-Mauduit France acquired a specialty paper manufacturer located in Indonesia. It paid $8.4 million net of cash acquired, funded through existing bank lines of credit.

The Indonesian operation had net sales of $6.7 million in 2003. The financial results of the Indonesian operation are expected to be accretive to earnings this year, but will not be significant.

This acquisition provides Schweitzer-Mauduit with a manufacturing presence on a fourth continent, and will improve our ability to address the needs of our customers in both Indonesia and the southeast Asian markets. We expect to upgrade the capacity and quality of our manufacturing capabilities in Indonesia to support the demand for tobacco-related products in the region.

As the result of seasonal working capital needs, capital spending and the Indonesian acquisition, the company's net debt increased during the quarter and the total debt to capital ratio increased from 27% at the end of 2003, to 32% at the end of the first quarter. The increase in net debt required increased borrowings under existing bank credit facilities.

Earlier today, Schweitzer-Mauduit announced a quarterly common stock dividend of 15 cents per share. This dividend will be payable on June 14, 2004, to stockholders of record on May 17. The company has declared and paid quarterly dividends of 15 cents per share since the second quarter of 1996.

Schweitzer-Mauduit has begun limited production and sales of banded and print-banded cigarette papers. We continue to work with our customers in their development of lower ignition propensity cigarettes.

On December 31, 2003, the state of New York announced the adoption of a final fire safety standard for cigarettes that requires all cigarettes sold in the state of New York after June 28 of this year, to have lower ignition propensity properties.

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

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

Momentum does appear to be building for the implementation of fire safety standards for cigarettes. On March 31, 2004, Canada passed a bill that amends its hazardous products act to allow the regulation of cigarette ignition propensity under that act. This new law calls for the development of regulations for ignition propensity properties for cigarettes sold in Canada, although an implementation time line is not specified.

It is our expectation that this new law may result in increased sales of lower ignition propensity cigarette papers in Canada by late next year.

In addition, on April 2, 2004, HR bill number 4155 was introduced in the U.S. House of Representatives that would provide for fire safety standards for all cigarettes sold in the United States. This bill would require the implementation of lower ignition propensity properties based upon the state of New York's standards, in all cigarettes within 24 months after enactment of the bill.

Schweitzer-Mauduit will continue to face various cost pressures during the balance of 2004. The per ton cost of wood pulp is expected to be above prior year levels, unfavorably impacting cost of products sold. The company's purchased energy costs are also expected to be higher during the balance of the year, compared with the comparable period of 2003. Increases have also been experienced in our employee benefit costs, and labor rates. We typically have a lag in our ability to offset such cost increases in our product pricing.

These unfavorable cost factors are expected to be more than offset by the contribution of increased sales and production volumes, primarily from the new RTL production line in France. Accordingly, operating profit for full-year 2004 is expected to be above 2003 operating profit.

The higher full-year operating profit is expected to be offset, however, by increased net interest expense, and minority earnings and a higher effective income tax rate compared with 2003. As a result, Schweitzer-Mauduit is expecting diluted earnings per share for 2004 to be approximately at the 2003 level.

That concludes our planned comments. Meredith, could you please open the phone line for questions?

At this time, I would like to remind everyone in order 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&A roster.

Your first question is from Ann Gurkin with Davenport.

Good afternoon.

Hello, Ann.

A couple of questions. If we could start with the Indonesia acquisition. What is the expected growth rate of that market and your growth rate versus the market rate?

The growth rate in that area is in the mid single digits. We believe we've got an opportunity to grow quite a bit faster than the market rate.

Okay. And have you reviewed the amount of capital investment you need to put into Indonesia?

We have, and the amount that we would expect to have to spend in Indonesia is included in the guidance that we've given as far as the total capital spending requirements for our company this year and next year.

Okay. Do you know who the supporters are of the legislation or the proposed bill in the House of Representatives?

Senator Markey out of Massachusetts was the lead legislator. I believe there were some 50 different people that co-sponsored the bill.

And do you have any estimate of time frame of what happens with that?

No idea. I think that really is very uncertain, Ann.

Okay. Have you experienced any higher costs related to the production of the banded or printed banded paper in terms of companies adjusting for the standards in New York, maybe changes their specs on the paper?

The standards for New York are a more stringent standard than say what had initially been used in banded cigarette paper that was first introduced commercially in the marketplace, so cigarette manufacturers are having to adjust because the standard is tighter, certainly waste levels are tighter than what you would have with the normal cigarette paper.

I would say that we continue to see improvement in our cost of manufacturing, as we produce these papers, but it is a significantly more expensive product.

Are you having to spend to reset machines or anything like that?

No, we are not. The capital spending has already been incurred by us to support the requirements of the state of New York.

Okay. What is the outlook for operating profit in the U.S. for 2004?

We haven't given guidance by business segment. But we would expect to see an improvement over the performance of the first quarter.

Okay. And then last, given that we've heard cigarette manufacturers talk about tough markets, in say France, Germany, and now Canada, are you seeing any change in order patterns, any inventory building, can you give us an update there?

I don't think we're seeing any significant change, Ann. Our sales into Western Europe have been reasonably stable. Certainly there has been a decline in consumption in particular in France, with higher excise taxes in that market, and our sales have certainly moved with that market, but on balance I would say we haven't seen a significant change in our sales patterns.

And would you comment on your inventory levels worldwide? For cigarette paper. Excuse me.

I would say really nothing significant to comment on.

Okay. Great. Thanks very much.

Thank you, Ann.

Your next question is from Frank Rosen (ph), private investor.

Hey, Paul, how are you?

Good, Frank. How are you today?

All right. Just maybe to second some of the comments you made with respect to time lag, but it seems to me that you have a narrowing of margins that is primarily cost driven. And I'm wondering what kind of time lag is involved there, and whether the majority, the large majority of those costs can be eventually passed on to customers?

I would say there is really two categories of costs, Frank. The tightening of our margin in the first quarter were in part due to less than really satisfactory operations in our mills, primarily in the U.S., but to a lesser degree in Brazil. That's something we believe we have corrected. We have operated better in March and so far better in April. Those aren't costs that you would expect to pass through, because really we should have operated a little bit better. And that, I think, we have dealt with, and we would expect to see better costs of manufacturing in subsequent quarters.

The higher wood pulp and energy costs, we do have an ability to pass those through to different customers. Some of them are on a quarterly basis. Some customers are on a semi-annual, and others on an annual basis, when things come up for renewal. They certainly, I would say, over time, we pass those through, but for some customers, the lag could be as much as a year.

As you look at 2004, how much of an impact will wood pulp and energy have on your operating profit?

I guess I would rather not give an estimate, Frank. It certainly will be negative, the balance of the year, compared to last year, but again, I would rather not quantify it.

Okay. I look at the closing costs in Paris, $900,000 first quarter, $300,000 second quarter, the startup expenses of $400,000 in RTL, the $1.1 million loss in the U.S., which I would guess you would not view as a normalized number, an $800,000 cost in Brazil, and probably several million dollars of wood pulp and energy costs that you, over time, would expect to pass on to customers, and it seems to me you're looking at something in the order of 6, $7 million of additional operating profits that on a normalized basis you would expect to generate.

Well, I agree with the items that you mentioned, Frank, but several of those were one-time in nature. The Paris closure costs, for instance, we would expect to see a nice reduction in our nonmanufacturing costs, beginning in the second half of the year, once that is fully implemented. And several of the other things that you said, we will be seeing benefits in future periods.

The other item I just wanted to touch on is currency.

Yes.

In the past, in the past at times, a strong dollar has actually hurt you. Here, it appears that a strong Euro has hurt you. And again, it strikes me that that is more of a short-term impact since over time, the Euro profits that you generate from your RTL business ought to translate into a big positive in dollars.

Right, and actually the negative with the Euro is more on our French paper business than on our French reconstituted tobacco business, where the stronger Euro on RTL because most of that is tied to Euro pricing, so there, there is a positive with the stronger Euro.

Currency during the quarter was really more of a negative in Brazil than it was with the Euro. In Brazil, our sales in particular of non-tobacco papers, or excuse me of tobacco papers are tied to the U.S. dollar and with the Brazilian real being 21% stronger on average during the quarter, the local costs then were 21% higher when expressed in U.S. dollars. So the margin on those products was hurt by the movement in currency during the quarter.

We will be anniversarying really in the second quarter the stronger real and there does appear to be signs that the real will be weakening later in the year so we would not expect that to continue.

Thank you. Last question, Paul, is in terms of your capital structure, where do you view your ideal debt to cap ratios to be, and how do you see that evolving over the next year or so?

We're not uncomfortable with the debt to capital ratio where it is right now, at about 32%. We've got, I think it is a reasonable capital structure. I would expect it to stay in that range, or maybe improve a little bit during the year. If there are strategic opportunities, or if we were to spend on share repurchase, we might see debt going up a little bit.

Wayne has mentioned in the CEO's letter in the past that we are very optimistic of being successful with a joint venture in China. Again, if there are things that were appropriate from a strategic standpoint, we would be certainly willing to take our debt to capital higher than where it is now, up into the 40 or low 40% range if we felt that there was strong cash generating capabilities to support that.

Okay. All right. Thank you very much. Thanks, Paul.

Thank you, Frank.

Take care.

Again, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone key pad. And Mr. Roberts, at this time there are no questions.

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

Thank you. This concludes today's conference call. You may now disconnect.