Mativ Holdings Inc (MATV) 2004 Q2 法說會逐字稿

Good morning. My name is Phyllis and I will be your conference facilitator for today. At this time I would like to welcome everyone to the Schweitzer-Mauduit second quarter earnings release 2004 conference call. [OPERATOR INSTRUCTIONS]. Mr. Roberts, you may begin your conference.

Thank you Phyllis. Good morning. I am Paul Roberts, 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 second quarter 2004 financial results. 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 or emailed 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 of 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 managements 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 an estimate. Such factors are discussed in more detail in the company's Securities and Exchange Commission (inaudible) report including the company's annual report on Form-10K 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 $0.56 compared with diluted earnings per share of $0.70 in the second quarter of 2003, an improvement of 12%. Earnings for the quarter benefited from increased sales volumes and improved mix of products sold and higher average selling prices. These positive factors were partially offset by increased cost and a higher effective income tax rate. Second quarter results were solid overall with year-to-year earnings improvement in each of business segment.

Net sales totaled a $161.6 million, an increase of 14%. This increase was caused by higher average selling prices, changes in currency exchange rates and increased sales volume. The company had increased production and sales of lower ignition propensity cigarette papers. Momentum appears to be building for the implementation of fire safety standards for cigarettes. The company's gross profit margin was 18.3% compared with 18.1% in the prior year. Operating profit was $14 million, an increase of 2.5 million or 22% from the second quarter of 2003. Capital spending totaled $15.1 million compared with $15.6 million during the prior year quarter.

The newly constituted tobacco leaf production line in France continues to make excellent progress in its operations. Capital spending to implement the company's new cigarette paper manufacturing strategy (inaudible) is on schedule, with a rebuilt cigarette paper machine scouting up in the second quarter. I will now provide a more detailed review of our second quarter financial result and our outlook for the balance of the year.

Net sales, totaled $161.6 million, an increase of $19.9 million or 14% compared with the second quarter of 2003. Higher average selling prices had a favorable $9.5 million impact on the net sales comparison increasing net sales by 7%. The improvement in average selling prices was primarily in the US and French business units reflecting in part the improved mix of products sold and price adjustments related to increased wood pulp costs. Changes in currency exchange rates increased net sales by $6 million or 4% compared with the prior year quarter. The Euro was approximately 8% stronger versus the US Dollar, while the Brazilian Real was approximately 2% weaker versus the dollar. Unit sales volumes increased by 6% compared with last year having a favorable $4.4 million or 3% impact on the net sales comparison. Excluding sales of the Indonesian operation that was acquired in February of this year, sales volumes increased by 4%. Sales volume in our Brazilian business improved by 14% compared with the second quarter of 2003. This improvement was the result of increased sales of both tobacco related and commercial and industrial papers. Higher sales volumes were achieved in both the domestic Brazilian markets and in export.

Sales volumes for the print segment increased by 8% year-over-year primarily as a result of increased reconstituted tobacco leaf or RTL sales supported by the new production line. Excluding sales volumes of the Indonesian operation, which are included in the French business segment results, the increase in French sales volumes was 5%. French sales volumes are expected to continue to benefit from the new RTL production capacity. Sales volume in the United States declined by 4%. Lower sales of tobacco related papers were partially offset by increased sales of commercial and industrial papers.

Sales of lower ignition propensity cigarette papers did increase during the quarter. According to United States Department of Agriculture, export shipments of cigarettes were unchanged from the prior year level during the first four months of 2004, the most recent period reported. Imports of cigarettes for consumption in the United States were down 6% versus the same period last year. For full year 2004, we are anticipating that US cigarette consumption will decrease by approximately 2 to 3% with US cigarette production declining by a similar percentage. Gross profit was $29.6 million, an improvement of $4 million or 16% from the prior year quarter. The gross profit margin improved slightly from 18.1% in the second quarter of 2003 to 18.3%. The increase in gross profit was attributable to increased production and sales volumes and improved mix of products sold and higher average selling prices. These positive factors were partially offset by increased wood pulp, labor and employee benefit expenses. The stronger Euro compared with the US dollar also put pressure on the gross profit margin, since most of the cost in the French operations are incurred in Euros while approximately 25% of the sales of the French operations are in US dollars. The list price of the Northern Bleek Softwood Craft Pulp (ph) our bell leather pulp grade, averaged approximately $660 metric tons in the United States compared with $580 per metric ton in the second quarter of 2003, with 14% increase. The list price of Northern Bleek Softwood craft pulp increased by $30 per metric ton in both April and June and was at $680 per metric ton at quarter end. The list price held at $680 per metric ton during July but is expected to increase later this year as economic and seasonal factors are expected to tighten the market pulp supply and demand balance.

The year-over-year higher per ton wood pulp cost had an unfavorable impact on operating expenses of $800,000 in the second quarter. Increased wood pulp cost in both the French and the US operations were partially offset by somewhat lower per ton wood pulp cost in Brazil. Non-manufacturing expenses increased by $1.5 million or 11%, with increases in selling and general expenses. These increases were primarily in France in parts due to the strengthening of the euro versus the US dollar. (Inaudible) selling expenses in France supported the increased sales volumes. Non-manufacturing expenses also included $200,000 to complete closure of an administrative and sales office in Paris. Year-to-date $1.1 million of Paris office closure costs were incurred. The closure of the Paris office is expected to benefit non-manufacturing costs in the second half of this year. Non-manufacturing expenses as a percent of net sales declined from 10% in the second quarter of 2003 to 9.7% in the current year quarter.

Operating profit was $14 million an increase of $2.5 million or 22% compared with the second quarter of 2003. Operating profit return on sales improved to 8.7% from 8.1% in the second quarter of last year. The operating profit improvement reflected gains in each of our business segments. Operating profit in the French segment was $12.7 million, an improvement of $1.1 million over the last year. This improvement was the result of increased production and sales volumes and higher average selling prices partially offset by increased wood pulp, labor and non-manufacturing expenses.

Startup costs related to the new RTL production line totaled $200,000 and Paris office closure costs were $200,000 in the quarter. Operating profit in the US business unit totaled $2.1 million, an improvement of $1.1 million compared to the second quarter of 2003. the increase in profitability in the United States was the result of higher average selling prices and improved mix of products sold and increased production and sales of lower ignition propensity cigarette papers. These positive factors were partially offset by increased wood pulp, purchased energy, labor and employee benefit expenses. The new operations in the United States did improve significantly from a disappointing first quarter performance, although start up expenses totaling $900,000 were incurred related to the operation of a cigarette paper machine at the Spotswood, New Jersey mill that was rebuilt as part of the company's cigarette paper manufacturing strategy. Operating profit in Brazil improved by $300,000 to $1.1 million during the quarter. The increased production and sales volumes and lower labor and raw material costs were partially offset by lower average selling prices.

Interest expense increased by $400,000 caused by a higher level of outstanding debt required to support the company's recent capital spending and working capital requirement. Interest expense is expected to have an unfavorable impact on the year-to-year comparison during the balance of the year. Other income was $1.3 million favorable compared with the prior year quarter primarily attributable to foreign currency losses in 2003 caused by exchange rate changes on non-local currency denominated assets and liabilities in foreign subsidiaries of the company. Schweitzer-Mauduit's effective income tax rate was 26% for the quarter compared with an effective income tax rate of 14% in the second quarter of 2003. the lower effective income tax rate in the prior year quarter was primarily due to the settlement of tax audit assessments in the company's French operations.

Net income totaled $8.7 million, an increase of $1.2 million or 16% from net income of $7.5 million and diluted earnings per share was $0.56 compared with diluted earnings per share of $0.50 in the second quarter of 2003, a 12% gain. The improvement in both net income and diluted earnings per share was caused by the increase in operating profit and other income partially offset by increased interest expense and the higher effective income tax rate. During the quarter, Schweitzer-Mauduit repurchased 122,900 shares of its common stock at a cost of $3.5 million. This share repurchase activity was conducted under a board of directors authorization for the period January 1, 2003 through December 13, 2004 in an amount not to exceed $20 million. A total of $8.6 million of share repurchases has been completed thus far against this authorization. Additional share repurchases are expected during the balance of the year.

Earlier today Schweitzer-Mauduit announced a quarterly common stock dividend of $0.15 per share. This dividend will be payable on September 13th to stockholders of record on August 16. The company has paid quarterly dividends of $0.15 per share since the second quarter of 1996. The capital spending totaled $15.1 million compared with $15.6 for the second quarter of last year. Capital spending in 2004 included $2.8 million for construction of the new reconstituted tobacco leaf production line compared with $10.2 million during the second quarter of 2003. The new RTL production line in France began operation in the fourth quarter of 2003 and continued to make excellent progress. The production rate of the new line is increasing monthly and is approaching end of curve expectations. Implementation of the company's new cigarette paper manufacturing strategy that was announced during the second quarter of 2003 continued during the quarter. In support of this strategy, $12.4 million is being spent to install a new cigarette paper machine and supporting equipment at our Brazilian operation and $4.4 million is being spent to rebuild cigarette paper machine at our Spotswood paper mill in the United States. These capital projects are expected to be completed by the end of this year and should benefit future periods.

We incurred $5.6 million in spending for these two capital projects during this quarter. Schweitzer-Mauduit (inaudible) total capital spending for the full year to be approximately $45 million and to total approximately $30 million in 2005. Schweitzer-Mauduit has begun limited production and sales of lower ignition propensity cigarette papers. A new law that implemented fire safety standards for cigarettes in the state of New York, took effect on June 28th, 2004. As of that date, all cigarettes sold in New York are required to be capable of self extinguishing when they are not being smoked. The New York law requires manufacturers to certify that their cigarettes self extinguish 75% of the time in laboratory tests. On March 31 of this year, Canada passed a bill that provides for the regulation of cigarette ignition propensity properties. This new law calls for the development of regulations which were subsequently published on May 1. The proposed regulations mandate and ignition propensity standards for all cigarettes manufactured or imported into Canada on or after October 1, 2005. A 75 day public comment says, concerning these regulations ended July 14. The final standard and actual implementation date are still subject to change.

Schweitzer-Mauduit continues to work with our customers in the development of lower ignition propensity cigarettes in anticipation of the pending Canadian regulation and to also improve the performance of lower ignition propensity cigarette papers that are already being sold. As additional experience is being gained cost improvements are being achieved in the production of these products. Schweitzer-Mauduit is expecting its profitability to improve during the second half of 2004 compared with the first six months of the year. Sales of lower ignition propensity cigarette papers are expected to be higher during the second half than during the first half of the year. These 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. Increased contribution is expected from the RTL production line in France with startup costs behind us and increased production and sales volumes anticipated. Increased sales volumes from the French paper operations are also anticipated and the Paris office closure has been completed.

Startup costs will be incurred however during the third and fourth quarters related to the rebuilt cigarette paper machine in the United States and the new cigarette paper machine in Brazil. Although these startup costs should be offset by the improved operating efficiencies and increased volume from these upgraded machines. Schweitzer-Mauduit will continue to face serious cost pressures during the balance of the year. The per ton cost of wood pulp is expected to be above higher year levels with purchased energy costs also expected to be unfavorable. Increases have also been experienced in our employee benefit cost and labor rates. Interest expense will also remain above prior year levels. The company's effective income tax rate is expected to be 28 to 29% in the remainder of the year. With increased operating profit anticipated for full year 2004 offset in part by increased interest expense and the higher effective income tax rate compared with 2003, Schweitzer-Mauduit today reaffirmed its previously disclosed earnings guidance that diluted earnings per share for full year 2004 are expected to be approximately at the prior year level. That concludes our planned comments. Phyllis could you please open the phone lines for question.

Yes sir. [OPERATOR INSTRUCTIONS]. Your first question comes from Ann Gerkin of Davenport.

Good morning Paul.

Good morning Ann.

Couple of questions starting with - you mentioned momentum in terms of fire safety regulations, any feedback or any comments at our New York customer comment as I smoke these cigarettes with your paper?

Yes. I think it is a little bit early to get market data from industry resources that will probably coming out in early October. So again there really isn't anything that I could comment on at this point. We have heard that certainly that each of our customers you know did certify their cigarettes as meeting the New York standards and we were able - again meeting - working with all of our customers to meet their needs to comply with that June 28th deadline.

Okay. US operating profit was better than our forecast, is that due primarily to the mix of business or increased sales of low propensity paper or --

There was a combination of several things. Operations were better in the quarter than what we have seen previously. We did have somewhat higher selling prices. We did begin to offset some of the cost increases that we had seen. Part of that was adjustments related to pulp prices and we did benefit from the production and sale of the lower ignition propensity papers. We did have much more of an impact of that in the second quarter than we have had in any previous quarter. So it was really a combination of each of these Ann.

Okay. The recovery of costs which you just eluded to in terms of wood pulp, are you -- how far -- what is the lag like now in terms of recovering costs.

It really varies by customer. Some customers were able to adjust on a quarterly basis. Some on an annual basis, I would say probably on average it is probably a little bit more than a six month lag.

Okay. In terms of the wood pulp cost for the back half, you will affirm to be up double digit versus last year.

We will probably continue to be up double digit. Again looking at the third and fourth quarter of last year, wood pulp costs were down a little bit, the third quarter of last year compared to the second, they were only at 5.50 a metric ton and we were at 6.80 going into the third quarter. So certainly we would expect double digit changes in both the third and fourth quarter.

Indonesia (inaudible) we have been looking for some neutral results out of Indonesia, what has changed there?

Again we have been pleased with the results in Indonesia. Again we commented that it was accretive but significantly so. Again then looking at the added interest cost with the acquisition, it is certainly more than offset by the profitability. We have been pleased with the gains that we have been able to make both in the quality already of the product and in the productivity of the product which has improved the profitability.

Okay. Capex has run up a little bit, is that because of the increased investment in Brazil, or is there anything else?

It is really partly due to currency changes with the Euro being a little bit higher than when the projects were approved and what our projections were.

Okay and then in terms of the earnings outlook for the year really being cautious I guess primarily due to cost pressures both with the US doing a little bit better and think that of RTL of France. I guess can you walk me through a little bit why we aren't taking numbers up?

Again part of that we did have as we mentioned during the quarter $900,000 of startup expenses associated with the rebuilt machine at our mill in New Jersey, that was a little bit higher than we are anticipating. We are still not at end of curve on that machine and still have some things that we have to deal with. So that is something - again we are expecting startup costs in the second half of the year in both the US and Brazil with new machines coming on. I did mention that we are expecting the contribution from those efficiencies added volume and higher productivity on the new machines to essentially offset the startup costs but again I think there is reason just to be cautious there. We also did mention in our 10K that we do have one labor contract that expired yesterday at our mill in New Jersey, July 28, that contract expired but our workers continued to work under the contract. We continue to have discussions, but again that is something that we still have to resolve yet and that is something that is out there and again a reason for a little bit of caution.

Alright thanks very much.

Thank you Ann.

Your next question comes from Thomas Russo of Gardner Russo.

Good morning Tom.

Bob?

Yes Tom.

Hi Paul. Couple of questions, just reaffirm the Indonesian ownership by the French subsidiary, is that to capture the NOLs that exist in France?

No. Really the ownership is under France in part because reflecting that is being operated, it is almost being combined with our French business in terms of sales and marketing activity.

I see.

Because our French business always is showed us in that area and that is helping us in terms products that our Indonesian operation are not able to manufacture that we make in France. We are able to coordinate those sales more effectively now.

Very good. How about the combined efforts of Indonesia and France and then the corporates to tap China, any progress underway?

Relative to China?

Yes.

We continued to have discussions with the Chinese. We have been sayhing that for over two years now. We continue to make what we consider good progress, but again there is no deal until we have a deal. All I would say is we do continue to have good progress and we are hopeful that you know we would be able to announce something shortly in that but again there is nothing definite at this point and negotiations continue for our possible joint venture in China.

Wonderful. BAP has experienced what it means to pre-announce before deals are deals, so I think you are wise to keep it quiet until you have something ...

I think that a difference also, we are negotiating with STMA, the State Tobacco Monopoly Administration and they effectively would be a partner with us in the joint venture that we are considering and it is the STMA that came out and said that BAP had not gotten their approval, so we are really working very closely with you know what we consider the key agency that is responsible for monitoring and controlling the tobacco industry in China.

Thank you and lastly can you talk a bit about counterfeit, I am curious about what New York will start to see in the way of counterfeit reduced ignition propensity product and how you will go about participating along with the manufacturers of cigarette and policing against counterfeit?

That is a difficult question relative to lower ignition propensity. Again we are not sure how smaller manufacturers or people that maybe counterfeiters would get access to our product. We are careful to sell our product only to known cigarette manufacturers and it is a fairly complicated process to ensure that the lower ignition propensity papers do work correctly and meet their requirement. The state of New York does require an indicator on all of the cigarettes that have low ignition propensity indicating that they are certified as having passed that test. So again I think the compliance is going to be the responsibility of the State of New York. Our approach really is to be sure that we know who we are selling to.

And then in regards to New York, in Wall Street Journal read an article about tipping flakes and the possibility of those tipping flake burns increasing because of low propensity. What answer do you have to that article?

The article in Wall Street Journal was referring to an issue that came out really around a couple of years ago, what we refer to as cold drop off, where the burning ash of the core of the cigarette apparently there were some indications a couple of years ago about that dropping off. Our understanding is - again that - and this was with Merit brand cigarettes which we provide the paper to fill up more. Our understanding is that "Fill Up Mores" (ph) made changes at that point. We worked with them, made changes in the products we provided them in response to changes to Fill Up Mores' product specification and that issue really has been resolved. So I think really the Wall Street Journal article was referring really to something that we consider kind of old news.

Thank you Bob. Good work.

Thanks Tom.

[OPERATOR INSTRUCTIONS]. Your next question comes from Thomas Russo of Gardner Russo.

Hi Paul again. (Inaudible) rarely have others chimed in. I am curious about the Canadian situation. One of the things that is plaguing Canada is a fast growing low run (inaudible) market. To what extent do you think regulations such as this might help the manufacturers erase some of that migration choice low on product and will your product be specified to meet the November '05 requirements?

Well I guess a couple of aspects to your question here Tom. Again we are working very closely with the major cigarette manufacturers in Canada and we already have commitments from several of them that we will be their supplier of paper for the lower ignition propensity papers in Canada. Our feeling and talking to our customers is that this - new regulation is very likely to be passed. The proposed implementation date is October of next year. We have not heard yet the results of the comment period that just ended and then based upon that comment period the regulations either new or as proposed would have to be tabled in the house of commons for 30 sitting days and then would have to be applied for registration and then published again. So the process will still take a little while. It is still possible that there could be changes in the regulation, but the feeling is that Canada is pretty serious of proceeding with this and it is very likely to be implemented for the fourth quarter of next year. The Canadian cigarette market is - maybe around 8 to 9% of the US domestic cigarette market, so it is a fairly significant piece of business. Now the cigarette is required to meet this new requirement was sophisticated. They require the higher quality papers and again it requires a higher level of technical expertise not only from a paper manufacturer but a cigarette manufacturer to be sure that the testing requirement are properly met and this probably would be much more of a challenge for a smaller manufacturer to comply with than it would a larger manufacturer and I guess in that regards since it would be a more sophisticated cigarette, more demanding, it probably would be more difficult for smaller fringe players, low priced cigarette manufacturers as you mentioned to compete effectively.

Okay thanks Bob.

Thank you Tom.

At this time there are no further questions.

Okay. We would like to thank everyone for taking the time to join us today. Good bye.