Mativ Holdings Inc (MATV) 2005 Q2 法說會逐字稿

Good morning.

My name is Rashida, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the second-quarter earnings conference call for Schweitzer-Mauduit 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).

Thank you.

Mr. Roberts, you may begin your conference.

Thank you, Rashida.

Good morning.

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 second-quarter 2005 financial results.

Various comments or remarks that we may make during today's conference call 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.

Actual results may differ materially from the results suggested by these statements for a number of reasons.

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 review the highlights of the quarter.

Diluted earnings per share were $0.38 compared with diluted earnings per share of $0.56 in the second quarter of 2004, a decline of 32%.

Operating profit was $10.7 million, a decline of $3.3 million, or 24% from the prior-year quarter.

The Company's gross profit margin was 15.6% compared with 18.3% in the prior-year quarter.

The decline in profitability compared with the second quarter of 2004 was the result of the inability to fully offset inflationary cost increases through either improved mill operations or higher selling prices.

The financial results were also unfavorably impacted by currency exchange rates, interest expense, and the effective income tax rate.

These unfavorable factors were partially offset by improved mill operations and increased sales volumes.

Net sales totaled $168.2 million, 4% above the prior-year quarter.

The positive net sales impact of increased sales volume and currency exchange rates were partially offset by the effects of lower average selling prices.

Capital spending totaled $4.7 million compared with $15.1 million spent during the prior-year quarter.

Spending for our major capital projects is now behind us.

In June, we completed the acquisition of tobacco-related paper manufacturing assets in the Philippines with a total acquisition cost of $11.9 million.

Earlier this month, we announced execution of an agreement to form a joint venture to produce tobacco-related papers in China.

The joint venture will build a new state-of-the-art paper mill, having two paper machines.

Construction is expected to take approximately 2 years, following receipt of governmental approvals.

Project spending is expected to total approximately $100 million.

I will now provide a more detailed review of our second-quarter financial results and our outlook for full year 2005.

Net sales were $168.2 million, an increase of $6.6 million, or 4%, compared with the second quarter of 2004.

Unit sales volumes increased by 3% compared with last year, having a favorable $6.1 million or 4% impact on the net sales comparison.

Sales volumes in the United States increased by 14%.

Although increased sales of tobacco-related papers were realized, the volume improvement in the United States was primarily due to increased sales of commercial and industrial products.

Sales of cigarette paper for lower ignition propensity cigarettes were significantly lower during the quarter, due to strong sales in the second quarter of 2004, prior to the introduction of lower ignition propensity cigarettes in the state of New York last June.

Sales volumes in our Brazilian business improved by 3% compared with the second quarter of 2004.

This improvement was the result of increased sales of tobacco-related papers that more than offset a decline in commercial and industrial papers.

The increased sales of tobacco-related papers in our Brazilian business were primarily due to increased export sales.

Sales volumes for the French segment were essentially unchanged from the prior-year quarter.

Reconstituted tobacco leaf, or RTL, sales volumes were 6% above the prior-year quarter and 20% above the first quarter of 2005.

The increased sales of RTL products offset lower sales volumes in the tobacco-related papers business.

Changes in currency exchange rates increased net sales by $4.3 million, or 3%, compared with the prior-year quarter.

The Brazilian real was approximately 22% stronger versus the U.S. dollar, while the euro was approximately 4% stronger versus the dollar.

Although changes in currency exchange rates had a positive impact on net sales, they had a $1.5 million unfavorable impact on the Company's operating profit during the quarter.

Lower average selling prices had an unfavorable $3.8 million, or 2%, impact on the net sales comparison.

Lower average selling prices were experienced in our French and U.S. operations as a result of both a less favorable mix of products sold and lower product selling prices in France.

Gross profit was $26.2 million, a decrease of $3.4 million, or 11%, from the prior year quarter.

The gross profit margin was 15.6%, declining from 18.3% in the second quarter of 2004.

The decline in both gross profit and gross profit margin was attributable to lower average selling prices and significant inflationary cost increases.

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

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

The inflationary cost increases unfavorably impacted operating results by $6.3 million in the quarter, with purchased energy having the most significant unfavorable impact.

Purchased energy costs increased by $2.7 million compared with the second quarter of 2004.

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

Changes in the per-ton cost of wood pulp increased our operating expenses by $1.3 million compared with the prior-year quarter.

The list price of northern bleached softwood kraft pulp, or NBSK, a bellwether pulp grade, averaged approximately $655 per metric ton in the United States during the quarter compared with $660 per metric ton in the second quarter of 2004.

Although the NBSK list price was essentially the same as during the prior-year quarter, higher pulp costs were experienced due to other pulp grade price increases and lags in the implementation of the NBSK list price changes, as NBSK list prices decreased during the current year quarter but increased during the prior-year quarter.

The most recent world pulp statistics indicate that pulp shipments are increasing, and the day's supply of inventory is decreasing.

This data suggest that the world pulp market is likely to stabilize over the seasonally weak summer period with a potential increase in pulp prices in the fall if the current strong demand is sustained.

In addition to the higher energy and wood pulp costs, increased costs were also incurred for other purchased materials, driven largely by higher chemical costs.

Increased costs for other purchased materials had an unfavorable impact on the quarter's operating results of $1.5 million.

Labor rates and employee benefit costs also increased compared with the prior-year quarter, with the higher labor rates increasing manufacturing expenses by $800,000.

Non-manufacturing costs were essentially at the prior-year level.

Lower selling expenses were largely offset by increased research and general expenses.

Non-manufacturing expenses declined from 9.7% of net sales in the second quarter of 2004 to 9.2% in the current year quarter.

Operating profit was $10.7 million, a decline of $3.3 million or 24%, compared with the second quarter of 2004.

Operating profit return on sales was 6.4% compared with 8.7% in the second quarter of last year.

Operating profit was lower in each of our business segments.

The U.S. business unit had a breakeven operating profit for the quarter, a decline of $2.1 million compared with the second quarter of 2004.

Lower average selling prices and increased purchased energy, wood pulp, labor and employee benefit expenses were partially offset by the benefits of improved mill operations and higher sales volumes.

The sales mix in the United States was much less favorable than in the prior-year quarter with the reduced sales of lower ignition propensity cigarette papers.

Operating profit in the French segment was $11.5 million, a decline of $1.2 million from the prior-year quarter.

The decrease in profitability was the result of lower product selling prices, a less favorable sales mix, increased purchased energy, purchased materials and labor expenses, and unfavorable currency impacts.

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

Reconstituted tobacco leaf sales volumes did improve during the second quarter and were above both the prior-year quarter and the first quarter of 2005.

Operating profit in Brazil was $1 million during the quarter, a decline of $100,000 from the second quarter of 2004.

Increased sales volumes and improved mill operations contributed positively during the quarter but were more than offset by the unfavorable currency impacts and increased cost of sales.

The higher cost of sales reflected increased costs for wood pulp, purchased energy, and labor, as well as startup expenses of $100,000 related to the operation of a new cigarette paper machine.

The strengthening of the Brazilian real versus the dollar during the quarter had an unfavorable impact on operating profit of $1.3 million.

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

The prior-year quarter effective income tax rate benefited from changes in the estimates of foreign tax credit carry-forwards to be utilized in the United States.

Net income totaled $5.8 million, a decline of $2.9 million or 33% from net income of $8.7 million.

Diluted earnings per share were $0.38 compared with diluted earnings per share of $0.56 during the second quarter of 2004, a 32% decline.

The decline in both net income and diluted earnings per share was caused primarily by the lower operating profit, increased interest expense, and minority owner earnings, and the higher effective income tax rate -- partially offset by an increase in other income, which was related primarily to currency exchange rate gains in Brazil.

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

This dividend will be payable on September 12, 2005 to stockholders of record on August 15, 2005.

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

Capital spending totaled $4.7 million compared with $15.1 million in the second quarter of 2004.

Capital spending for our major strategic projects is now behind us.

Spending for the Company's new cigarette paper manufacturing strategy, which included rebuilt or new cigarette paper manufacturing equipment in both the United States and Brazil has now been completed.

Schweitzer-Mauduit is expecting capital spending for both 2005 and 2006 to be approximately $25 million each year.

In June, Schweitzer-Mauduit completed the acquisition of tobacco-related paper manufacturing assets in the Philippines.

The total acquisition cost was $11.9 million, funded through existing bank lines of credit.

The assets acquired included buildings, two paper machines, various converting equipment, and related utilities and support assets.

The mill that was acquired is the only domestic producer of tobacco-related papers in the Philippines and had an estimated 60% market share of the Philippines' cigarette paper market in 2004.

The acquisition is not expected to have a significant impact on Schweitzer-Mauduit's 2005 financial results but should be a positive contributor to future earnings improvement.

Earlier this month, Schweitzer-Mauduit announced execution of an agreement to form a joint venture to produce tobacco-related papers in China.

The joint venture would produce both cigarette paper and porous plug wrap in partnership with the China National Tobacco Corporation, or CNTC, which is the principal operating company under China's state tobacco monopoly administration.

CNTC and a wholly-owned subsidiary of Schweitzer-Mauduit will each own 50% of the joint venture.

The joint venture is subject to obtaining project financing and various governmental approvals.

The joint venture will build a new state-of-the-art paper mill with two paper machines having a total annual production capacity of approximately 18,000 metric tons.

Construction is expected to take approximately 2 years following receipt of governmental approvals.

Project spending, which includes both capital expenditures and working capital requirements, is expected to total approximately $100 million.

The joint venture is expected to have a capital structure of approximately one-third equity from the partners and two-thirds debt, with project financing being obtained by the joint venture itself.

Schweitzer-Mauduit has been selling tobacco-related papers in China for approximately 20 years.

This joint venture will allow us to increase our service to the Chinese cigarette market, which represents roughly 30% of the world cigarette consumption.

The new mill is expected to quickly establish its position as a premiere supplier of papers to the Chinese tobacco industry.

Although Schweitzer-Mauduit had limited production and sales of cigarette paper for lower ignition propensity cigarettes during the second quarter, momentum seems to be building for this product.

During June, regulations were finalized in Canada that require lower ignition propensity properties.

The final regulations mandate an ignition propensity standard for all cigarettes manufactured or imported into Canada on or after October 1 of this year.

During June, the state of Vermont also passed legislation that requires all cigarettes sold in Vermont as of May, 2006 to have lower ignition propensity properties.

Thus far in 2005, in addition to the state of Vermont, 14 other states have introduced bills that provide for lower ignition propensity properties for cigarettes.

There have also been discussions about ignition propensity standards for cigarettes in several foreign countries, including Australia, New Zealand, South Africa, and the United Kingdom.

We continue to work with our customers in their development of lower ignition propensity cigarettes in anticipation of the new Canadian regulations and to also improve the performance of cigarette papers for lower ignition propensity cigarettes that are already being sold.

Increased sales of these cigarettes are expected during the second half of 2005 in support of the Canadian regulations.

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

Increased sales of reconstituted tobacco leaf products are also anticipated during the second half of 2005.

Although year-to-date, RTL volumes still lag the prior year, for full year 2005, RTL sales volumes are expected to be above the 2004 level.

Continued weakness is expected, however, in Schweitzer-Mauduit 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 new cigarette paper manufacturing capacity that was added by European competitors in 2003 and 2004.

This market weakness is expected to result in continuing paper machine downtime in France.

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

The rebuilt paper machines are now running at end of curve production rates.

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

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

Higher purchased energy costs are expected to have an unfavorable impact on the full year of approximately $10 million or $0.42 per share.

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

The weakened U.S. dollar versus the Brazilian real and the euro is also expected to continue putting pressure on our financial results.

In both Brazil and France, costs are primarily based on local currencies, while selling prices are often indexed to the U.S. dollar.

In Brazil, as in the second quarter, the unfavorable currency impacts are expected to more than offset the benefits of the new cigarette paper production capacity.

The Company's effective income tax rate is expected to be approximately 6 to 7 percentage points higher than the effective income tax rate in 2004 in the range of 28 to 29%.

The prior-year effective income tax rate benefited from the utilization of foreign tax credits and other non-recurring tax items.

The higher effective income tax rate is expected to have a negative impact of approximately $0.15 to $0.20 per share for the full year compared with 2004.

As a result of the greater than previously anticipated inflationary cost increases and unfavorable currency exchange rate impacts, primarily in Brazil, Schweitzer-Mauduit lowered its earnings guidance for 2005 earlier this month.

We are now expecting diluted earnings per share for 2005 to be in the range of $1.40 to $1.50 for the year.

That concludes our planned comments.

Rashida, could you please open the phone line for questions?

(OPERATOR INSTRUCTIONS).

Ann Gurkin, Davenport.

A couple of questions -- I wanted to start in Western Europe.

With the lowered volume and lower prices, is this a permanent reduction in your share and the pricing in Western Europe?

Can you comment on that?

Again, the pricing in Western Europe for the most part was set in the second half of last year prior to us experiencing the level of inflationary increases that we did experience, and certainly that was not our expectation then -- was when pricing was negotiated.

I think there is going to continue to be pressure on our pricing and our volumes going forward.

But in the second half of this year is when we would be renegotiating pricing for next year, and our expectation would be to try to get some increased pricing during the second half.

Are you willing to give up some share on volume to maintain margins?

If that would result in improved margins, we would.

It is not our expectation that the margins would remain where they are.

We would expect a little bit of a lag effect to be able to get some improved pricings to offset some of the cost increases.

Okay.

Looking to the U.S., can you comment again what the outlook is for the margin -- long-term margin goals for the production facility in the U.S. following the restructuring?

Was it low-single digits?

Is it what?

I'm sorry.

Low-single digits -- operating margin?

It probably is going to be in the single digits.

But again, as you know, we have experienced pretty close to breakeven operating profit in the last couple years.

We are expecting with the restructuring that we have done with some improvements in manufacturing capabilities that the Spotswood mill -- with increased growth of lower ignition propensity cigarette papers and with some increased volumes of the non-tobacco papers -- that we would see our margins improving in the United States but probably into the mid-single digit range at least in the short term.

Great.

And then the volume, are the sales up 14% in the U.S. due to primarily commercial industrial papers?

Can you comment on that a little bit?

And then, how are laminate sales?

Yes, in the United States, as we mentioned, the growth was primarily in the non-tobacco paper products.

There was increases in our volume of papers for the financial printing market.

Although that does absorb fixed costs, it is not a significant contributor for us to our earnings.

As far as furniture laminates, there was also some improvement in our sales in furniture laminates.

Although the most significant increase was in the volume of our financial printing papers, we did also have double-digit volume growth in our furniture laminates.

Okay.

Given the cost pressures you are facing -- energy, wood pulp, etc. -- have you given anymore consideration to increasing your use of hedges?

It is something that we are looking at.

We would be locking in though closer to the current rates if we were to hedge.

There is some hedging in place for some currency, for some of our euro transactions.

Typically, how we have approached it in energy is to look at the possibility of locking into longer term contracts for things like purchased natural gas, which effectively is a form of hedging.

But it is something that we are looking at.

Hedging rates today are not particularly attractive though.

Okay.

What is your currency or what is your outlook for the real for the second half of the year?

Conventional wisdom, as good as that is, in Brazil is that the expectation is that the real would be weakening a little bit from where it is today.

But as we saw, the real went up dramatically in the second quarter, much stronger than what the Brazilian government and all of the banks in Brazil were expecting.

So our expectation is that it will probably begin to weaken a little bit but probably not significantly the balance of the year.

Okay, and then congratulations on China.

What is your market share currently in China?

For cigarette paper, we are in the -- roughly, I guess about -- I would say 10 to 12% range for cigarette paper in China.

I think at our peak, back in the late 1990s, imports of cigarette paper were close to 50% in China.

And we had about half of that market.

It has become a little bit more self-sufficient, and we are probably in the range of 10, 12% today.

Okay, and can you comment -- if your arrangement with the monopoly includes the ability to add RTL going down the road?

The joint venture that we contracted -- we have signed itself (ph) -- is just for producing the two products that we've talking about, cigarette paper and porous plug wrap.

But what we believe it does do based upon discussions we have had is that -- opens the door for discussion on reconstituted tobacco leaf as well.

And this location, although it is a good location for tobacco-related papers, a reconstituted tobacco operation may not be best suited in that location.

That is still something that we are in the process of looking at.

Thomas Russo, Gardner Russo.

I have several questions.

What will be the timing and amount of spend that you might have in China as far as -- with the rollout of your reduced propensity paper in Canada, how much of the sales in a market like that will cannibalize your own existing product?

And how much will be new product sales into the market that you are not currently sharing in?

And then, just an update, if you could on those two new acquisitions in Asia, how they are coming along?

Okay, I think first of all, on China, as we mentioned in the press release, the construction period is expected to take about 2 years for the acquisition.

We would expect governmental approval to come anywhere in, let's say, 3 to 6-month kind of timeframe, hopefully somewhere around the end of this year.

So the capital spend itself would primarily be in '06 and '07 and probably fairly evenly split in those 2 years.

Our investment in the joint venture, as I mentioned in my comments, the capital structure of the JV would be about one-third equity and two-thirds debt.

And if the total investment is about 100 million, our part of that would be about 50 million, and our part of the equity investment then would be in the range of about 16 to $17 million.

So as far as funding from Schweitzer-Mauduit, we would be looking at putting in an investment of roughly $17 million, a small portion of that this year, perhaps 10 to 15% of the equities later this year, late in the year.

And the balance of that equity would be invested in '06 and '07.

In terms of the lower ignition propensity cigarettes in Canada, we have a significant market share today in Canada in excess of 80%.

So a majority of what we would be selling on lower ignition propensity cigarettes would be replacing a product that we already sell.

Although we have agreements with all of the major producers in Canada, we would expect to see our market share in Canada for lower ignition propensity papers going essentially to 100%.

So there would be some market share gains in Canada coming from the lower ignition propensity.

Relative to the two acquisitions in Asia, we completed an acquisition in Indonesia in the first quarter of last year, the first quarter of 2004.

I would say that during the first year, that acquisition met all of our objectives in terms of improved productivity, improved sales volume, and improved operating margins.

We also put together an improvement program for the single cigarette paper machine that operates in that country.

Most of that work -- although the capital dollars were not large -- it was significant for that facility.

Most of that work was completed during the second quarter of this year.

There was about a year lead-time to get all of the various equipment in.

We're still -- I would say in a little bit of a startup mode with that machine having been rebuilt.

But thus far, it is on track to provide improved quality and improved productivity that we would expect to see continued benefits the second half of this year and especially in 2006 coming from that operation.

In the acquisition, in the Philippines, was a little bit different than the acquisition in Indonesia.

That acquisition was completed right at the end of June, and it was an asset purchase as opposed to acquiring the stock in an existing company.

So we have to recruit, put in place a new management team, and really start as a new operation.

I would say that everything has again -- we are confident on how things are going there.

We have got a good management team in place that we have been working with.

Some of the principles for more than 6 months, and we are pleased with how that is going.

We are developing a plan as far as making improvements there.

There is not significant profit contribution really coming from that operation this year as we mentioned.

Part of the reason is that under purchase accounting, under U.S.

GAAP, the inventories that you obtain, you have to write those up really to market value so that there is not a profit component in what you are selling out of inventory.

And once we work through that, we would expect to see some profits improving.

So I think in summary, we are pleased with where we are in both Indonesia and the Philippines.

It's still very early in the process in the Philippines, but we like the team that we have there.

We think that they are approaching things correctly, and we have got confidence that we will be seeing improved volumes and profitability coming out of both of those operations.

In China, just the last point, to what extent will the enterprise that you joined in China have the ability or the right to sell any of your products -- size of the Chinese market over time?

Right now, the agreement is that this joint venture is primarily to service the Chinese market.

We will have 50% ownership; we will have 50% representation on the Board of Directors.

And whether the joint venture sells product outside of China or not will really be up to the Board of Directors of the joint venture.

But in the agreement, we have anticipated that, that if it is in the best interest of the joint venture -- but those sales would be coordinated with the sales of Schweitzer-Mauduit so that it would not be a competitive threat to us.

(OPERATOR INSTRUCTIONS).

Jonathan Lichter (ph).

I just had a question about the CapEx.

Is the lower CapEx guidance related to the downtime in France?

No, I think the lower CapEx in part reflects the fact that our earnings and our cash flow are weaker than we were anticipating.

And we think that it makes sense to lower those, so we are trying to be a little bit more selective in what our CapEx will be.

Okay, and the higher pulp -- do you expect that -- well, in your guidance, do you have higher pulp for later in this year?

We are anticipating pulp prices to probably remain fairly stable in the third quarter and then to probably ratchet up a little bit in the fourth quarter.

Again, looking at the market, that is what we are anticipating, and that is what is in our earnings guidance.

Sir, there are no further questions at this time.

Okay.

Thank you, Rashida, and I would like to thank everybody for taking the time to join us today.

Goodbye.

This concludes today's second-quarter earnings conference call for Schweitzer-Mauduit conference call.

You may now disconnect.