Mativ Holdings Inc (MATV) 2005 Q1 法說會逐字稿

Good afternoon, my name is

and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Schweitzer-Mauduit First Quarter Earnings Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will a question and answer period. [OPERATOR INSTRUCTIONS].

Mr. Roberts, you may begin your conference.

Thank you Sierra.

Good afternoon I am 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 first quarter 2005 financial results.

Our conference call is later in the day than it is typical, because of our Board of Directors' meeting and the annual shareholders' meeting that were conducted earlier today.

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 or e-mailed to you.

Various comments or remarks that we may make during today's conference call concerning future expectations, plans and prospects for the Company and the 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 31, 2004.

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

Diluted earnings per share were $0.32 compared with diluted earnings per share of $0.42 in the first quarter of 2004, a decline of 24%.

Operating profit was $9.6 million, a decline of $2.6 million or 21% from the prior-year quarter.

The Company's gross profit margin was 15% compared with 18.2% in the prior-year quarter.

The decline in profitability compared with the first quarter of 2004 was the result of lower sales volumes primarily related to the timing of reconstituted tobacco leaf sales, the inability to fully offset inflationary cost increases to either improved mill operations or higher selling prices, unfavorable currency impacts, and a higher effective income tax rate.

Net sales totaled a $160.6 million, essentially unchanged from the prior-year quarter.

The positive net sales impacts of currency exchange rates and changes in average selling prices were largely offset by the effects of lower sales volumes.

Capital spending totaled $3.5 million, compared with $8 million spend during the prior-year quarter.

Capital spending to implement the Company's new cigarette paper manufacturing strategy has been completed and startup costs related to the upgraded paper machines in both the Unites States and France are now largely behind us.

I would now like to provide a more detailed discussion of our first quarter financial results and our outlook for full-year 2005.

Net sales at $160.6 million were essentially unchanged from the $159.9 million in the first quarter of last year.

Changes in currency exchange rates increased net sales by $5.2 million, or 3% compared with the prior-year quarter.

The euro was approximately 5% stronger versus the US dollar, while the Brazilian real was approximately 9% stronger versus the dollar.

Higher average selling prices had a favorable $1.2 million impact on the net sales comparison.

The improvement in average selling prices was primarily due to the mix of product sold, which more than offset lower individual product selling prices, primarily in our French operations.

Unit sales volumes declined by 6% compared with last year, having an unfavorable $5.7 million or 4% impact on the net sales comparison.

Sales volumes for the French segment declined by 12% year-over-year, primarily as a result of lower sales of reconstituted tobacco leaf or RTL products.

The decline in RTL sales volumes was caused by differences in the timing of customer orders.

For the full year, RTL sales volumes are expected to be above the prior year level.

Sales volumes in our Brazilian business improved by 7%, compared with the first quarter of 2004.This improvement was a result of increased sales of both tobacco-related and commercial and industrial papers.

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

Sales volumes in the United States increased by 4%.

This improvement was primarily the result of increased sales volumes of commercial and industrial papers.

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

Gross profit was $24.1 million, a decrease of $5 million or 17% from the prior-year quarter.

The gross profit margin was 15%,

declining from 18.2% in the first quarter of 2004.

The decline in both gross profit and gross profit margin was attributable

to the decrease in sales volumes and significant inflationary cost increases.

Higher costs were incurred for purchased energy, wood pulp, purchased materials, labor rates, and employee benefit expenses.

The weaker US dollar versus both the euro and the Brazilian real also put pressure on the gross profit margin, since cost in both France and Brazil are primarily incurred in local currencies, while selling prices are often linked to the US dollar.

Purchased energy cost increased by $1.8 million, compared with the first quarter of 2004.

Higher energy costs were experienced in all business units related to higher energy, fuel oil, and natural gas costs.

The list price of northern bleached softwood kraft pulp, a bellwether pulp grade, averaged $670 per metric ton in the United States during the quarter, compared with $600 per metric ton in the first quarter of 2004, a 12% increase.

The list price of northern bleached softwood kraft pulp began the quarter at $650 per metric ton and increased to $680 per metric ton in February.

The list price has remained at $680 through April.

Further increases in the list price of northern bleached softwood kraft pulp are expected later this year.

Higher pulp prices are being supported by continuing strong worldwide demand for wood pulp.

Year over year higher per ton wood pulp costs had an unfavorable impact on operating expenses of $1.1 million in the first quarter.

In addition to the higher energy and wood pulp cost, higher costs were also incurred for purchased chemicals and other materials used in the manufacturing process.

Labor rates and employee benefits also increased compared with prior-year quarter.

Startup cost totaling $600,000 were incurred related to upgraded paper machines in both United States and Brazil compared with $400,000 of startup cost incurred in France during the prior-year quarter associated with a new RTL production line.

Non-manufacturing cost declined by $2.4 million, or 14% with lower general and selling expenses.

Non-manufacturing expenses declined from 10.6% of net sales in the first quarter of 2004 to 9% in the current-year quarter.

General expense was $1.4 million lower compared with the first quarter of 2004, primarily as a result of a decrease in compensation cost.

Selling expense declined by $1.1 million, which was primarily the result of lower sales commissions in France associated with the drop in sales volumes and expenses incurred in the prior-year quarter to close an administrative and sales office in Paris.

Operating profit was $9.6 million, a decline of $2.6 million or 21% compared with the first quarter of 2004.

Operating profit return on sales was 6% compared with 7.6% in the first quarter of last year.

During the first quarter, improved profitability in our US operations was more than offset by lower operating profit in the French and Brazilian segments.

Operating profit in the French segment was $10.8 million, a decline of $3.1 million from the prior-year quarter, primarily in our reconstituted tobacco leaf operations.

The decline in profitability in France was the result of lower sales volumes, primarily related to the timing of RTL shipments, lower product selling prices, a less favorable sales mix, increased wood pulp, purchased energy, labor and purchased materials expenses, and unfavorable currency impacts.

These factors were partially offset by improved mill operations and lower non-manufacturing costs.

Both Selling & General expenses in France declined during the quarter, reflecting reduced compensation costs, the impact of the lower sales volumes on sales commissions, and $900,000 incurred in the first quarter of 2004 to close the Paris office.

Startup expenses of $400,000 were also incurred during the prior-year quarter associated with the new RTL production line.

Operating profit in Brazil was $300,000 during the quarter, a decline of $900,000 from the first quarter of 2004.

Increased sales volumes and lower non-manufacturing costs contributed positively during the quarter, but were more than offset by unfavorable currency impacts, which accounted for more than half of the operating profit difference and higher cost of sales.

The higher cost of sales reflected increased cost for purchased energy and labor and startup costs of $300,000 related to the operation of the new cigarette paper machine.

The US business unit had an operating loss of $400,000 in the quarter, which was a $700,000 improvement over the first quarter of 2004.

Improved mill operations and a better mix of products sold contributed to the earnings improvement, more than offsetting higher purchased energy, wood pulp, labor, and employee benefit expenses.

Startup expenses totaling $300,000 were incurred, related to the operation of a cigarette paper machine at the Schweitzer New Jersey mill that was rebuilt as part of the Company's new cigarette paper manufacturing strategy and a rebuilt tipping paper machine the Lee, Massachusetts mill that recommenced operations during the fourth quarter of 2004.

These rebuilt paper machines are both now operating at end-of-curve production rates.

Schweitzer-Mauduit's effective income tax rate was 29% for the quarter compared with an effective income tax rate of 26% in the first quarter of 2004.

The prior-year quarter effective income tax rate benefited from utilization of foreign tax credits.

The effective income tax rate is expected to be approximately 28 to 29% for full-year 2005.

Our effective income tax rate was 22% for full-year 2004.

Minority interest in earnings of subsidiaries declined by $500,000 from $1.8 million in the first quarter of 2004 to $1.3 million in the first quarter of 2005.

This decrease reflected lower earnings at LTRI or LTR Industries due to the differences in the timing of customer orders.

LTRI is a French subsidiary of the Company, which produces reconstituted tobacco leaf products.

LTRI does have a minority owner that owns 28% of the shares of LTRI.

Net income totaled $5 million, a decline of $1.5 million or 23% from net income of $6.5 million.

Diluted earnings per share were $0.32 compared with diluted earnings per share of $0.42 during the first quarter of 2004, a 24% decline.

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

During the quarter, Schweitzer-Mauduit repurchased 29,000 shares of its common stock at a cost of $1 million.

This share repurchase activity was conducted under a Board of Directors' authorization for the period January 1, 2005 through December 31, 2006 in an amount not to exceed $20 million.

Earlier today, Schweitzer-Mauduit announced a quarterly common stock dividend of $0.15 per share.

This dividend will be payable on June 13, 2005 to stockholders of record on May 16, 2005.

The Company has paid quarterly dividends of $0.15 per share since 1996.

Capital spending totaled $3.5 million compared with $8 million in the first quarter of 2004.

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

As a part of this strategy, cumulatively $12.5 million has been spent to install a new cigarette paper machine and supporting equipment at a Brazilian operation and $4.4 million has been spent to rebuild a cigarette paper machine at our Spotswood Paper Mill.

These capital projects have now been completed.

We incurred $400,000 in spending in Brazil during the quarter related to its new paper machine compared with $1.8 million spent in Brazil and the United States during the first quarter of 2004 related to these capital projects.

In addition, during the first quarter of last year, capital spending for the new RTL production line in France totaled $2m.

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

During November 2004, we announced that an agreement had 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 $11.3m, subject to working capital adjustments.

This transaction is subject to various governmental permitting and authorizations, and is expected to close during the second quarter of this year.

This acquisition is not expected to have a material impact on our financial results in 2005.

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

A law that implemented to fire safety standards for cigarettes in the State of New York took effect in June, 2004.

Regulations are being implemented in Canada that would require an ignition propensity standard for all cigarettes manufactured or imported into Canada on or after October 1, 2005.

As a result, sales of cigarette papers for lower ignition propensity cigarettes are expected to increase mid-year in support of the Canadian introduction.

During the balance of 2005, Schweitzer-Mauduit expects to have a significant increase in the sales volume of reconstituted tobacco leaf products compared with the first quarter of 2005.

For the full year, RTL sales volumes are expected to be above the full-year 2004 level.

Additional weakness is expected, however, in our sales of tobacco-related papers in Western Europe.

Weakness is expected in both sales volumes and in product selling prices as a result of reduced cigarette consumption in several Western European countries and a new cigarette paper manufacturing capacity that was added by European competitors in 2003 and 2004.

This market weakness is expected to result in French paper machine operating schedules being reduced from the first quarter level, which is expected to have an unfavorable impact on our French paper operations during the balance of the year.

Schweitzer-Mauduit will continue to face significant cost pressures this year.

The per ton cost of wood pulp is expected to remain above the 2004 levels as a result of continuing strong demand for pulp.

Purchased energy costs are expected to be significantly higher than prior expectations and much higher than the prior year with higher cost for purchased electricity, fuel oil, and natural gas.

Higher purchased energy costs are expected to have an unfavorable impact of approximately $6m or $0.25 per share on the full year.

Higher chemical costs, labor rates, and employee benefits are also expected to continue.

The weakened US dollar versus both the euro and the Brazilian real is also expected to put pressure on our financial results.

In both France and Brazil, costs are primarily based on local currencies, while selling prices are often linked to the US dollars.

For the full year, the unfavorable currency impacts in Brazil are expected to roughly offset the benefits of the new cigarette paper production capacity in that country.

Startup costs, related to the upgraded paper machines in both United States and Brazil, are largely behind us.

The rebuilt paper machines in the United States are now running at the end-of-curve production rates.

Startup costs in Brazil are expected to total approximately $200,000 during the second quarter.

With the upgraded production equipment in place, improved mill operations are expected the balance of the year, especially in the United States.

As stated earlier, the company's effective income tax rate is expected to be approximately 6-7 percentage points higher than the effective income tax rate in 2004 in the range of 28-29%, as the prior year effective rate benefited from utilizations of foreign tax credits and other nonrecurring items.

The higher effective income tax rate is expected to have a negative impact.

Of approximately $0.25 per share for the full year compared with 2004.

Primarily as a result of the higher than previously anticipated cost increases, especially for purchased energy, the weakness in the Western European tobacco-related papers market and greater than previously expected unfavorable currency exchange rate impact, Schweitzer-Maudit is lowering its earning guidance for 2005.

We are currently expecting diluted earnings per share to be in the range of $2.05 to $2.15 for the year.

Sierra, that concludes our planned comments.

Could you please open the phone lines for questions?

[OPERATOR INSTRUCTIONS].

Ann Gurkin, Davenport & Company, LLC.

Hello Ann.

I was wondering if you can start with the RTL issue.

If you could talk a little bit about, kind of what happened, what are the reasons for the timing -- the shift in the timing?

Is it fair to assume that volume for the year for RTL can be up high-single digit versus last year?

And third, can you give us -- what you project to be the production in metric tons for RTL in '05?

Okay.

First of all, there were couple of factors that contributed to the 25% reduction in RTL sales volume.

Part of it was that the first quarter of last year was the first quarter of operation of the new capacity, first full quarter, after it was brought on screen at the end of 2003.

There was some pent-up demand for RTL, our capacity probably could have been brought on from a market demand standpoint perhaps as much as the year earlier.

We did work with some customers for them to reduce their inventory prior to start-up.

So, part of the demand in the first quarter of last year was a little bit of filling a pipeline.

Also this year, we simply are seeing a little bit different ordering pattern from our customers.

We do have confidence that our full-year sales volumes of reconstituted tobacco will be above what they were for full-year 2004.

As we mentioned, we expect to see stronger RTL sales volumes coming in each of the next 3 quarters.

We do expect our RTL sales volume probably to be up mid-to-high single digits compared to the prior year for the full year.

And I forget the exact production last year.

I think it was in the range of about 68,000 metric tons.

So, it would be that percentage increase off of that base, Ann.

Okay.

Great, and the timing of booking the RTL, evenly spread throughout the year, or more in the second half versus the second quarter earnings?

No.

It's going to be more in the second half, and it will be higher in the second quarter than in the first, but we are going to see much stronger third and fourth quarters for RTL.

Okay.

Moving to the weakness in the Western European cigarette market, can you tell us how much capacity has been added over the past couple of years?

How much are -- okay.

There were two machines added, one by

, which I believe was in mid 2003 and one by

in mid 2004.

I believe both of those machines were in the range of probably about 8,000 or so metric tons each.

So, we probably saw from those 2 machines an increase of total worldwide cigarette paper capacity of several percentage points, maybe a 4 to 5 percentage point increase of capacity.

Unfortunately, that capacity came on stream at a time when we have seen some fairly significant reduction in consumption in some of the largest markets in Western Europe.

France and Germany both last year reported double-digit decline in cigarette consumption in those countries, in part due to higher taxes.

In fact, the German government came out recently within last week or two and said they will, as a result, they've gotten less tax revenues than anticipated and they are anticipating foregoing one additional tax increase that was scheduled last year.

So, I think, they even were surprised by the impact on consumption.

Can you say how much share you've lost in Western Europe, particularly paper?

I would not -- I am not sure what that would calculate into, and I am not really sure.

Okay, you talked about lower average selling prices in France, is that due to the RTL timing or are you reducing prices on cigarette paper to try to get some business?

I'd say the impact was more on the paper side of things, reflecting weakness in the marketplace.

And you see those prices staying at that level for the balance of the year?

I think, given the competitive situation in Western Europe, I think, it's going to be difficult seeing price increases which is unfortunate, given the cost pressures that we're under right now.

Did you take any plant downtime in the first quarter in France?

We took one small cigarette paper machine down.

That was down during the quarter, and we would expect probably to have one or two additional machines down -- small cigarette paper machines down in the second quarter.

And not in the second half of the year?

And would probably continue with those down.

Okay.

And just addressing China, two issues on China.

One, do you have any comments regarding Phillips Morris' or the potential announcement of Phillips Morris licensing the production of Marlboro to the Chinese tobacco companies.

And will you pick up any -- do we have any benefit from that?

And then secondly, any progress on your joint venture in China?

Okay, I think first on Phillips Morris.

They did announce that or it was announced, I am not sure if Phillips Morris announced that they were close to reaching an agreement to have a license in China for manufacturing Marlboros.

What isn't, I think, clear yet is, who would have control over the sourcing of raw materials and those sorts of thing, but the volumes that I've heard that they are talking about would be an extremely small share of the market, in the range of 1 or 2 percentage points.

So, I think, at least the initial expectation that it would be very small and the paper requirements for that would also be very small.

Again...

1-2% of the Chinese market is a pretty big share.

Well in terms of tons of paper required, that would be a pretty small volume.

That would be a significant, I think, it could

Phillips Morris if they achieved it, but I don't think it would be a material impact on to get the volume.

Okay, and then your joint venture in China?

Yes, we continue to work very closely with the State Tobacco Monopoly Administration or STMA, have been negotiating with them for a couple of years as far as a new joint venture in China.

Our negotiations are largely completed, our various analyses and feasibilities have been completed, and right now the project is under what we understand as a final internal review within STMA.

Assuming a positive go ahead from them, which we would expect to have since they initially approached us, hoping that we would do a joint venture in China, we would still need to get formal governmental approval which could still take several months yet.

So, I think, we are still -- we're optimistic that we would have -- be in a position to announce something during 2005 yet, but again there is no certainty, given how long it takes things to work their way through in China.

And then we would be looking at probably a two-year construction phase before we'd be up and operating.

Given the announcement

I don't think it would have an impact on it, Ann.

Okay, great thanks.

Thank you.

,

Partner.

Could you give a little bit more color on what you mean by timing, I am still not clear what that means for the RTL volumes?

For RTL, a lot of, Nick, usually our orders there are fairly large in quantity and usually the shipments are pretty large and they come in batches, I would say, it's not like buying a small unit of something.

And quiet often we can have shifting from one quarter to the next depending upon where we are in terms of production runs, if we are in the middle of a large run for a customer.

But then also differences in their inventory levels, or what have you.

Based upon commitments that we've got from customers, we feel pretty comfortable that our total year sales will be above the prior year -- the total year sales volumes, but again and certainly were not as strong in the first quarter.

Got it.

Had things broken differently, how much of that do you think you would have seen on the inventory line?

Part of the increase in inventory certainly reflects higher inventories of reconstituted tobacco.

We make two different kinds of products or reconstituted tobacco.

One, utilizes materials that we received -- we received directly from customers and we simply process that material and then send it back to them.

The other we referred to is ready to use where we obtain the raw materials.

We produce that material and we ship that out.

The customers in it are a little bit more of a generic.

While we have the ability to do, as there is a weakness in our production schedule, we are able to make more of the ready to use so that we got production capacity later from more of the customer-specific materials.

So, we took-- used the opportunity when we had some capacity available in the first quarter to produce more of the ready to use.

But we do have orders for that later in the year, so, we are confidence we will be selling it.

So, we do expect to see our inventories coming down, inventories were higher than we are expecting as of the end of the first quarter and I would say maybe half of that difference was reconstituted tobacco inventories.

Got it.

Thank you.

Thank you Nick.

Stephen Wang, Steinberg Asset.

Foreign exchange assumption, when you talk about $2.05 to $2.10, what kind of exchange rate do you assume for the rest of year?

Do you assume they are going to be flat with the current exchange rate?

We are expecting, first of all, in Brazil, that they will be weak -- there will be a slight weakening in the Brazilian currency, but not a dramatic weakening.

We had previously thought that the average for the year in Brazil would probably be around $0.32 for the Brazilian currency, and right now, it's running about $0.37, and the $0.32 was really based upon consensus of The Economist late last year in that country.

Unfortunately, right now, the Brazilian currency is running and our estimate is, it will be about 16% higher for the full year compared to what we were expecting which -- has actually the Brazilian currency as much more of an impact on our earnings projection and the change in guidance than does the euro, the euro, we are expecting to remain -- our projection and in our guidance is assuming that it remains at the current level at a $1.30 for the euro.

Again, as recently as September, October, our expectation was, it was going to be more like a $1.20 for this year.

So, again, it's remained more strength than we were expecting earlier.

Right, could you help us quantify, let's say each 1% of change in real, how could that impact your earnings?

Could you run some excess or plus?

I have to sit down with a pen and pencil and will prove it, but I think conceptually, Stephen, I would estimate, again, just for analysis purposes assume let's say about 80% of the selling price is tied to the US dollars because a lot of it is tobacco papers.

And the majority of the costs are incurred in the local currency, and I think if you just did a variation on the cost of manufacturing for one additional penny and then kept the selling prices largely constant, I think you could get a pretty good estimate.

But for euro, there is a some natural hedging there, right?

Yes, there is, and that's why I mentioned, even though the changes have been much more dramatic over the last several years, we haven't commented on currency being as much of an impact, and in fact versus the prior year, we would expect, as I said, the change in the Brazilian currency to have much more of a negative impact.

What we have found is that, with the start-up of the reconstituted tobacco line, we are selling more products tied to the US dollar selling prices.

Again, that's typical for reconstituted tobacco sales, and as a result of that, we don't have quite natural a hedge as we have previously.

We got a little bit more exposed quite a bit of our exposure is still covered by the natural hedge.

Got it.

So, if I look at your foreign exchange exposure arena, is that fair to say maybe 70:30 kind of split between real and the euro?

Is that about right or--?

I'd say, it may not be quite that much to the real to the euro, but it is in that general range.

On the energy cost inflation from this quarter, if you can quantify, it's about -- a second please -- what did you say about -- you said it $1.8 million kind of year-over-year comparison?

Right.

In the first quarter, energy was negative about $1.8 million for us.

And we're saying that we would expect for the full year to be negative in the range of about $6 million.

$6 million?

Right.

Okay.

And I wouldn't say that energy costs account for probably about -- I see that 3 key things that we mentioned, higher energy costs, the changes in currency and the weakness in our French paper operations.

Each contributed almost roughly about the same to change in earnings guidance, which was about -- we lowered the earnings guidance by about $0.30 to $0.35 a share, and each of those 3 things is probably in a range of over $0.10 a share, just ballpark contributing to that lower earnings guidance.

Okay.

And one last question on pricing increase.

I understand you talk about component market in Europe, how about the rest of the market?

Have you assumed any price increase to further offset any of this price -- cost inflation?

I would say -- we -- although excess capacity is in Western Europe, most of our sales are to multinationals that have -- are certainly aware what the supply and demand balance is, and I'd say that capacity has made it much more difficult to get pricing in all of our operations.

So, it sounds like on global market -- the impact is on the global market?

The impact is on the global base.

Got it.

So, going forward for modeling purpose, maybe we just assume -- maybe kind of normal inflation type of price increase, like 1to 2% rather than -- I think in the last 3 quarters you actually achieved quite a significant price increase?

Yes.

I would expect that we would have less price increases than we've seen the past.

Right.

Okay.

Great.

Thanks.

Thank you, Stephen.

[OPERATOR INSTRUCTIONS].

At this time, there are no further questions.

Mr. Roberts, are there any closing remarks?

Sierra, thank you for coordinating the call, and I would like to thank everyone for taking time to join us today.

Good bye.

This concludes today's Schweitzer-Maudit's first quarter earnings conference call.

You may now disconnect.