Mativ Holdings Inc (MATV) 2004 Q4 法說會逐字稿

Good morning.

My name is Misty (ph) and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Schweitzer-Mauduit International fourth-quarter 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 period. (OPERATOR INSTRUCTIONS) Mr. Roberts, you may begin your conference.

Thank you, Misty.

Good morning.

I am Paul Roberts, the Chief Financial Officer at Schweitzer-Mauduit.

With me is Wayne Grunewald, our Corporate Controller.

Thank you for joining us for our review of our fourth-quarter 2004 financial results.

After discussing our results, we will open the phone lines for your 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 defense 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 our annual report on Form 10-K for the year ended 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 71 cents, compared with diluted earnings per share of 61 cents in the fourth quarter of 2003, an improvement of 16 percent.

Net sales totaled $171.9 million, an increase of 17 percent.

This increase was caused by increased sales volumes, changes in currency exchange rates, and improved mix of products sold and higher average selling prices.

The gross profit margin was 18.5 percent, compared with 20 percent in the prior-year quarter.

Operating profit was $14.8 million, an increase of $800,000, or 6 percent, from the fourth quarter of 2003.

In addition to the improvement in operating profit, the financial results benefited from a lower effective income tax rate and foreign currency gains.

These items were partially offset by minority interest, which was $1.4 million higher than the prior-year quarter.

Capital spending totaled $12.8 million, compared with $30.8 million during the prior-year quarter.

Capital spending to implement the Company's new cigarette paper manufacturing strategy is almost completed.

A new cigarette paper machine began operation in Brazil earlier this month and is running well.

Although the Company's Indonesian operation that was acquired in February 2004 is located in Medan on the island of Sumatra, its operations and sales were fortunately not affected by the earthquake and tsunami that struck Indonesia in late December.

I will now provide a more detailed review of our fourth-quarter financial results and our outlook for the balance of the year.

Net sales totaled $171.9 million, an increase of $24.5 million, or 17 percent, compared with the fourth quarter of 2003.

Unit sales volumes increased by 14 percent compared with last year, having a favorable $14.2 million, or 10 percent, impact on the net sales comparison.

Excluding sales of the Indonesian operation, sales volumes increased by 13 percent.

Sales volumes for the French segment increased by 21 percent year-over-year, primarily as a result of increased sales of reconstituted tobacco leaf, or RTL, which was supported by the new RTL production line that began operation in the fourth quarter of 2003.

Excluding sales volumes of the Indonesian operation, which are included in the French business segment results, the increase in French sales volumes was 18 percent.

French sales volumes are expected to continue to benefit from the new RTL production capacity.

Sales volumes in our Brazilian business improved by 9 percent compared with the fourth quarter of 2003.

This improvement was the result of increased sales of tobacco-related papers.

Higher sales volumes were achieved in both the domestic Brazilian market and in exports.

Sales volumes in the United States increased by 1 percent.

Higher sales volumes of tobacco-related papers were partially offset by lower sales volumes of commercial and industrial papers.

Sales of cigarette paper for lower-ignition propensity cigarettes continued during the quarter.

According to the United States Department of Agriculture, export shipments of cigarettes increased by 3 percent from the prior-year level during the first 10 months of 2004, the most recent period reported.

Imports of cigarettes for consumption were down 7 percent versus the same period.

For full year 2004, we are anticipating that U.S. cigarette consumption decreased by approximately 3 percent, with U.S. cigarette production declining 1 to 2 percent.

Changes in currency exchange rates increased net sales by $6.7 million, or 5 percent, compared with the prior-year quarter.

The euro was approximately 13 percent stronger versus the U.S. dollar, while the Brazilian real was approximately 4 percent stronger versus the dollar.

Higher average selling prices had a favorable $3.6 million impact on the net sales comparison, increasing net sales by 2 percent.

The improvement in average selling prices was primarily in the U.S. business unit, reflecting in part an improved mix of products sold and price adjustments related to increased wood pulp costs.

Gross profit was $31.8 million, an improvement of $2.3 million, or 8 percent.

The gross profit margin was 18.5 percent, declining from 19.3 percent in the third quarter of 2004, as well as from the 20 percent gross profit margin experienced in the fourth quarter of 2003.

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 purchased energy, wood pulp, labor, employee benefit and paper machine startup expenses.

The stronger euro compared with the U.S. dollar put pressure on the gross profit margin, since most of the costs in the French operations are incurred in euros, while approximately 25 percent of the sales of French operations are in U.S. dollars.

Purchased energy costs increased by $1 million compared with the fourth quarter of 2003.

Higher energy rates were experienced in the U.S. and French business units, related to higher natural gas, fuel oil, and electricity costs.

The list price of northern bleached softwood kraft pulp, a bellwether pulp grade, averaged $630 per metric ton in the United States during the quarter, compared with $575 per metric ton in the fourth quarter of 2003, a 10 percent increase.

The list price of northern bleached softwood kraft pulp began the quarter at $620 per metric ton and increased by $30 per metric ton in December to $650.

An additional list price is expected in the first quarter, which could put first-quarter 2005 pulp prices 10 to 15 percent higher than the $600 per metric ton average during the first quarter of 2004.

Higher pulp prices are being supported by strong pulp demand and declining wood pulp inventories.

Year-over-year, higher per ton wood pulp costs had an unfavorable impact on operating expenses of $800,000 in the fourth quarter.

Nonmanufacturing expenses increased by $1.5 million, or 10 percent, with increases primarily in general and selling expenses.

Higher general expense included increased cost for employee compensation and benefits and outside services related in part to Sarbanes-Oxley Act Section 404 compliance activities.

For full year 2004, Sarbanes-Oxley compliance costs totaled approximately $1.3 million.

The increase in selling expense was largely the results of sales commissions in France associated with increased sales volumes.

The stronger euro contributed to higher nonmanufacturing expenses in France.

Nonmanufacturing expenses as a percent of net sales decreased from 10.5 percent in the fourth quarter of 2003 to 9.9 percent.

Operating profit was $14.8 million, an increase of $800,000 or 6 percent compared with the fourth quarter of 2003.

Operating profit return on sales was 8.6 percent, compared with 9.5 percent in the fourth quarter of last year as a result of the decline in gross profit margin.

The operating profit improvement reflected gains in the French and Brazilian business segments, partially offset by a decline in operating profit in the United States.

Operating profit in the French segment was $17.1 million, an improvement of $3.7 million over the prior-year quarter.

This improvement was primarily the result of increased production and sales volumes and improved mill operations, partially offset by unfavorable mix of products sold, increased wood pulp, labor, purchased energy, and nonmanufacturing expenses.

Higher selling expenses were incurred in the French operations in support of the increased sales volumes.

Operating profit in Brazil increased by $100,000 to $800,000 during the quarter.

Increased production and sales volumes and lower nonmanufacturing expenses were partially offset by higher cost of sales.

Preoperating costs of $100,000 related to the installation of a new cigarette paper machine were incurred.

The U.S. business unit had an operating loss of $900,000 in the quarter, which was $2.8 million worse than the fourth quarter of 2003.

The decrease in productivity in the United States was the result of increased purchased energy, wood pulp, labor, and employee benefit expenses, poor mill operations, paper machine startup expenses, and unfavorable fixed cost absorption keyed (ph) to lower production volumes.

These negative factors were partially offset by higher average selling prices and improved mix of products sold and increased sales of cigarette paper for lower ignition propensity cigarettes.

Startup expenses totaled $1.1 million, and were incurred related to the operation of both a cigarette paper machine at the Spotswood, New Jersey mill that was rebuilt as part of the Company's new cigarette paper manufacturing strategy, and a would rebuilt tipping paper machine at the Lee, Massachusetts mill that recommenced operations during the quarter.

Additional startup costs associated with these machines are expected during the first quarter of 2005.

Other income was $800,000 favorable compared with the fourth quarter of 2003.

This improvement was the result of foreign currency gains in 2004 caused by the impact of exchange rate changes on non-local currency denominated assets and liabilities in Brazil and France.

Schweitzer-Mauduit's effective income tax rate was 10 percent for the quarter compared with an effective income tax rate of 21 percent in the fourth quarter of 2003.

The lower effective income tax rate in the quarter benefited from three different items.

First, a law was enacted in France during December that lowered the corporate income tax rate in France from 35.3 percent in 2004 to 34.8 percent in 2005 and to 34.3 percent in 2006 and subsequent years.

These lower future tax rates resulted in a reduction in the French net deferred income tax liability.

Second, a reduction of valuation allowances on deferred income tax assets related to foreign tax credits was recorded in the United States, in part related to the passage in October of the American Jobs Creation Act of 2004, which provides an additional five years to utilize foreign tax credits.

Third was the result of a favorable court ruling in November of 2004 which permitted the recovery of some prior-year income taxes in France.

The effective income tax rate in 2003 benefited from the Company's ability to utilize previously reserved foreign tax credits in the United States.

Minority interest in earnings of subsidiaries increased by $1.4 million from $1.2 million in the fourth quarter of 2003 to $2.6 million in the fourth quarter of 2004.

This increase reflected improved earnings at LTR Industries, or LTRI, which is the French subsidiary of the company that produces reconstituted tobacco leaf products.

LTRI has a minority owner that owns 28 percent of the shares of LTRI.

Net income totaled $10.9 million, an increase of $1.6 million, or 17 percent, from net income of $9.3 million.

Diluted earnings per share was 71 cents compared with 61 cents in the fourth quarter of 2003, a 16 percent increase.

The increase in both net income and diluted earnings per share was caused by the improvement in operating profit, foreign currency gains, and a lower effective income tax rate, partially offset by higher minority interest.

During the quarter, Schweitzer-Mauduit repurchased 15,800 shares of its common stock at a cost of $500,000.

Full-year share repurchases totaled 273,000 shares at a total cost of $8 million.

This share repurchase activity was conducted under a Board of Directors' authorization for the period January 1, 2003 through December 31, 2004 in an amount not to exceed $20 million.

A total of $13.1 million of share repurchases was completed against this authorization.

The Board of Directors authorized the Company to purchase up to an additional $20 million of its common stock during the two-year period commencing January 1, 2005.

Earlier today, Schweitzer-Mauduit announced a quarterly common stock dividend of 15 cents per share.

This dividend will be payable on March 14, 2005 to stockholders of record on February 14, 2005.

The Company has paid quarterly dividends of 15 cents per share since 1996.

Capital spending totaled $12.8 million, compared with $30.8 million in the fourth quarter of 2003.

Implementation of the Company's new cigarette paper manufacturing strategy continued during the quarter.

In support of this strategy, $12.7 million is being spent to install a new cigarette paper machine and supporting equipment at our Brazilian operation and $4.4 million was spent to rebuild the cigarette paper machine at our Spotswood paper mill.

These capital projects are nearing completion.

We incurred $2.9 million in spending for these two capital projects during the quarter and $13.6 million for full year 2004.

In 2003, $2.4 million in spending occurred in the fourth quarter, with 2.9 million for the full year.

The rebuilt cigarette paper machine at the Spotswood mill is still in the startup phase and the new cigarette paper machine in Brazil began operations earlier this month and is running well.

Capital spending for the quarter also included $500,000 for the new reconstituted tobacco leaf production line in France, compared with $17.8 million during the fourth quarter of 2003.

For the full year, 7.2 million in capital spending occurred in 2004, compared with $63 million in spending in 2003.

The new RTL production line began operation in the fourth quarter of 2003, continues to make steady gains, and has met end-of-curve expectations.

Schweitzer-Mauduit is expecting capital spending for 2005 and 2006 to be approximately $30 million each year.

During November of 2004, we announced that an agreement has been finalized whereby one of our subsidiaries will acquire the tobacco-related paper manufacturing assets of a company in the Philippines for a purchase price of $11.3 million, subject to working capital adjustments.

The transaction is subject to various governmental permitting and authorizations and is expected to close by the end of the first quarter.

This acquisition is not expected to have a material impact on the Company's financial results this year.

Schweitzer-Mauduit has continued limited production and sales of higher margin cigarette paper for lower ignition propensity cigarette.

A law that implemented fire safety standards for cigarettes in the state of New York took effect on June of 2004.

Since then, all cigarettes sold in New York are required to be capable of meeting a test standard of self-extinguishing at least 75 percent of the time when they are not being smoked.

Regulations are still being developed in Canada that would require lower cigarette ignition propensity properties.

The proposed regulations mandate an ignition propensity standard for all cigarettes manufactured or imported into Canada on or after October 1, 2005.

The final standard and the actual implementation date are still subject to change, although Schweitzer-Mauduit expects these standards to be finalized by February and for Canada to implement the proposed requirements effective in the fourth quarter of this year.

Schweitzer-Mauduit continues to work with our customers in their development of lower ignition propensity cigarettes in anticipation of the pending Canadian regulations and to also support the improved performance of cigarette papers for lower ignition propensity cigarettes that are already being sold.

As additional experience is gained, cost improvements are being achieved in the production of these products.

Schweitzer-Mauduit's financial results are expected to continue to benefit from increased production in sales volumes supported by the new RTL production line in France.

Sales of cigarette papers for lower ignition propensity cigarettes are expected to continue during 2005.

Increased sales of these products are expected midyear in support of the anticipated requirement for lower cigarette ignition propensity properties in Canada during the fourth quarter.

These papers sell for a higher price than the conventional cigarette papers they replace.

Increased cigarette paper volumes in Brazil, supported by the new cigarette paper machine that began operation this month and improved manufacturing operations in the United States, are expected to benefit the financial results in 2005.

Startup costs related to the upgraded paper machines in both the United States and Brazil are expected to continue in 2005 and could total approximately $1 million during the first quarter.

Schweitzer-Mauduit will continue to face other cost pressures during 2005.

The per ton cost of wood pulp is expected to be above the 2004 level as a result of increased worldwide pulp demand and declining wood pulp inventories.

Purchased energy costs are also expected to be unfavorable, given the current cost of oil.

Increases have also been experienced in our employee benefit costs and labor rates, which will continue in 2005.

Schweitzer-Mauduit also expects to begin expensing stock options in the third quarter of this year, which is expected to increase 2005 non-cash operating expenses by approximately $1 million.

Although market conditions for our businesses continue to be largely favorable, Schweitzer-Mauduit is experiencing weakness in tobacco-related paper sales in Western Europe.

This weakness is caused in part by reduced cigarette consumption in France and Germany, which are reportedly experiencing double-digit declines in cigarette consumption following tax increases on cigarette sales.

New cigarette paper manufacturing capacity was added in Western Europe in mid-2004 by one of our competitors, which is also contributing to a more competitive situation.

This may result in cigarette paper machine downtime in France in 2005.

Schweitzer-Mauduit is currently expecting operating profit to increase by approximately 12 to 15 percent in 2005, primarily as a result of the benefits of the RTL expansion, the new cigarette paper capacity in Brazil, improved manufacturing operations in the United States, and increased sales of cigarette papers for lower ignition propensity cigarettes.

These positive factors are expected to be partially offset by increased costs and expected weakness in the French cigarette paper business.

Schweitzer-Mauduit is expecting its effective income tax rate to be approximately 28 to 29 percent in 2005, up from 22 percent in 2004.

As a result, we are currently expecting diluted earnings per share for 2005 to be in the range of $2.40 to $2.45.

That concludes our planned comments.

Misty, could you please open the phone lines for questions?

(OPERATOR INSTRUCTIONS) Thomas Russo of Russo and Gardner, Russo & Gardner.

Good results.

I wondered when you mentioned the -- a couple of quick questions -- the increased capacity in Western Europe for cigarette paper by a competitor, do you have competitors there as well in RTL, and what is your forecast for the supply picture in Western European-sourced RTL?

The main competitors for RTL in Western Europe are the cigarette manufacturers themselves.

Some of them do have reconstituted tobacco capacity in Western Europe, but that capacity is not the papermaking type of capacity that Schweitzer-Mauduit has.

It is an alternative technology that does not provide the same uniformity of product that our RTL provides.

And in fact, we are providing RTL to cigarette manufacturers in Western Europe that have their own RTL capacity.

Okay, thank you.

And then, you mentioned the startup costs carrying over to the first quarter of possibly as much as $1 million.

What might the full year startup costs look like for those two machines?

Our expectation right now is that startup costs should be very minimal following the first quarter if we achieve our operating targets during the first quarter.

Okay.

Lastly, when you refer to net sales, just remind me what are you netting off against your sales and has that changed over the past quarters or years, or is it constant?

I guess first to answer the second part of it, it is constant.

It's calculated the same as we have consistently since we spun off.

And it typically in our industry represents, I believe, distribution expenses to our customers.

Okay.

Thank you very much.

Ann Gurkin with Davenport.

I wanted to start with any comments you might have on a recent Harvard study on reduced propensity cigarettes sold in New York and the likelihood that this may start (ph) a national standard this year.

Sure.

Earlier this year the Harvard School of Public Health did issue a press release that they had conducted a study of cigarettes manufactured in the state of New York that utilized the lower ignition propensity technology.

And in that study, they compared it to cigarettes that were manufactured and sold in the state of California.

Their conclusion to their study was that the New York cigarettes were far less likely to burn to the end of the cigarette than the same brands in California or Massachusetts.

Their study found that majority of the toxic compounds were not different between them and a further conclusion was that the new technology did not appear to have an effect on the sales of the cigarettes in New York, and they concluded that indicated consumer acceptance.

The conclusion of the Harvard study, or one of them, was an encouragement that this technology be taken beyond the state of New York to other states.

It is hard to speculate what impact this might have, although just a couple days after the publishing of the Harvard study, on, I believe, about January 24 or 25, just a couple days ago, a fire safety bill was introduced into California.

We also, as we commented in the press release and really on the conference call, we do expect Canada to be implementing this later this year.

So there does seem to be a movement, certainly more interest in that technology.

It is difficult to say when it might go beyond the state of New York, but it appears, I would say, probable at some point that it will extend beyond the state of New York.

Okay.

And in your forecast, 2.48 to 2.45, do you include sales of the lower propensity paper to Canada?

Is that in your forecast?

Yes, that is in our forecast, but additional sales beyond Canada are not included.

Okay.

In the U.S., the improved mix -- does that reflect an increasing percent of this banded paper?

Yes, it does.

Can you tell us what the sale of that banded paper contributed to the growth rate?

What percentage it represented.

I could not.

Normally, we would not give that information for a specific product.

Okay.

Are you on track with Sarbanes-Oxley?

Yes.

We have a largely concluded our work, and at this point, we believe that things are going well and we'll have a good opinion coming out of it.

We have completed our Sarbanes-Oxley compliance work in France and Brazil, which are two major foreign subsidiaries.

And that work has also been concluded by our outside auditor.

About all that is left is their review of preparation of our year-end reporting.

And again, as I said, we have not identified any material weaknesses nor any significant control deficiencies, and would anticipate getting a clean opinion from our outside auditor.

Great.

The downtime in France, when will that decision be made?

That's hard to say.

It may well be something in the first quarter.

Again, we will be looking at what our projections are for the full year.

Is that in your full-year projections?

To some degree.

Okay.

And then in France, the number of RTL lines, is the line number one running still?

Yes, at this point we have all three lines running.

We have brought back into operation the oldest line that was shut down after the new line hit end-of-curve.

But we are operating that on a part-time basis, probably about half-time at this point.

How long do you anticipate running that older line?

Again, with the demand continuing to grow for RTL, we would expect that we will have going forward a need to operate that line intermittently.

Right.

And then one more thing.

I wonder if you could help me.

If I understand correctly, Philip Morris International is going to take back the manufacturing of Marlboros in Japan.

How does that impact production in the U.S. that's shipped to overseas, impact your sales of paper?

Again, there would be a positive benefit, but I wouldn't be in a position to quantify it.

Is that in your forecast?

I would say in a general way, yes, based upon projections we've got from our customers.

Okay, great.

Thanks.

Mark Anderson (ph) with Axle (ph) Capital.

Just a couple quick questions.

Apart from the difference between your projected CapEx spend and depreciation for next year, which I think it looks like it's about $6 million, is there any other significant difference between reported EPS and a free cash flow number that we could expect?

That is probably the main one.

We do have pension contributions that come out of the other, but that has been running reasonably close to our pension expense of a little bit negative.

So that will probably be a little bit negative; but otherwise, I would think it is reasonably close.

Okay, great.

So basically, it would be an incremental $6 million of (ph) free cash flow.

Yes, with the capital spending coming down.

Great, thank you.

(OPERATOR INSTRUCTIONS) At this time there are no further questions.

Mr. Roberts, are there any closing remarks?

Misty, I would like to thank you.

I would like to thank everyone for taking the time to join us today.

Goodbye.

This concludes today's Schweitzer-Mauduit International fourth quarter earnings release conference call.

You may now disconnect.