Mativ Holdings Inc (MATV) 2005 Q4 法說會逐字稿

Good morning, my name is Sushanta and I will be your conference operator today.

At this time, I would like to welcome everyone to the Schweitzer-Mauduit Fourth Quarter 2005 Earnings Conference Call.

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

After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS].

Mr. Roberts, you may begin your conference.

Thank you Sushanta.

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 fourth 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 $0.19 compared with diluted earnings per share of $0.71 in the fourth quarter of 2004, a decline of 73%.

Operating profit was $8.3 million, a decline of $6.5 million or 44% from the prior-year quarter.

The company's gross profit margin was 12.9% compared with 18.5% in the prior year quarter.

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

Inflationary cost increases unfavorably impacted operating results by $10.1 million in the quarter.

The financial results were also unfavorably impacted by lower paper production volumes to reduce inventory levels, currency exchange rates, interest expense, and a higher effective income tax rate.

These unfavorable factors were partially offset by lower nonmanufacturing expenses, increased sales volumes, somewhat higher average selling prices and lower minority interest earnings.

Net sales totaled $175.3 million, 2% above the prior year quarter due to higher average selling prices and increased sales volumes.

Capital spending totaled $5.4 million compared with $12.8 million spent during the prior year quarter.

Spending for our major capital projects is behind us.

I would like to now provide a more detailed review of our fourth quarter financial results and our outlook for 2006.

Net sales increased by $3.4 million or 2% in the quarter.

Higher average selling prices had a favorable $4.5 million impact on the net sales comparison.

Higher average selling prices in the United States and Brazil offset -- more than offset lower average selling prices in our French operations.

The increase in average selling prices in the United States and Brazil was primarily attributable to a change in the mix of products sold.

Unit sales volumes increased by 5% compared with the prior year and had a favorable $2.6 million impact on net sales.

Excluding sales volumes from our operation in the Philippines, which was acquired in June of 2005, unit sales volumes would have increased by 3%.

Sales volumes in our Brazilian business improved by 30% compared with the fourth quarter of 2004.

This improvement was the result of increased sales of both commercial and industrial and tobacco-related papers.

The increase largely reflected greater export sales from Brazil.

Sales volumes for the French segment increased by 2% from the prior year quarter.

Sales volumes increased for both reconstituted tobacco leaf products and for tobacco-related papers.

Sales volumes in the United States decreased by 3%.

Lower sales of commercial and industrial products were partially offset by increased sales of tobacco-related papers.

Changes in currency exchange rates decreased net sales by $3.7 million or 2% compared with the prior year quarter.

The euro was approximately 7% weaker versus the dollar accounting for the negative impact.

During the quarter, the Brazilian Real was approximately 24% stronger versus the dollar, partially offsetting the impact of the weaker euro on the net sales comparison.

Gross profit was $22.6 million, a decrease of $9.2 million or 29% from the prior year quarter.

The gross profit margin was 12.9%, declining from 14.7% in the third quarter of 2005 and from 18.5% in the fourth quarter of 2004.

The decline in both gross profit and gross profit margin was largely attributable to significant inflationary cost increases and lower paper production volumes.

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

Inflationary cost increases unfavorably impacted operating results by $10.1 million in the quarter.

Purchased energy costs increased by $5.8 million compared with the fourth quarter of 2004.

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

Inflationary increases for purchased materials other than wood pulp unfavorably impacted operating results by $3.2 million, largely due to increased chemical costs.

Changes in labor rates increased manufacturing expenses by $600,000 during the quarter.

Changes in the per ton cost of wood pulp added $500,000 to our operating expenses compared with the prior year quarter.

The list price of northern bleached softwood kraft pulp, a bellwether pulp grade, averaged $640 per metric ton in the United States during the quarter compared with $625 per metric ton in the third quarter of 2005 and $630 per metric ton in the fourth quarter of 2004.

The world pulp market was relatively stable during the quarter, reflecting reasonably consistent demand.

Pulp prices could trend up slightly in early 2006 with the push of higher cost related to the sudden rise in oil and natural gas, and stable demand for market pulp in China.

Reduced paper machine operating schedules resulted in lower paper production volumes, primarily to control inventory levels.

This increased our operating expenses by $2.1 million during the quarter, primarily in France and Brazil.

Nonmanufacturing costs were $2.7 million less than the prior year quarter, a decline of 16%.

Lower general, research, and selling expenses were incurred.

General expense declined by $2 million during the quarter, primarily attributable to lower salaried employee compensation expenses.

Nonmanufacturing expenses declined from 9.9% of net sales in the fourth quarter of 2004 to 8.2% in the current quarter.

Operating profit was $8.3 million, a decline of $6.5 million or 44% compared with the fourth quarter of 2004.

Operating profit return on sales was 4.7% compared with 8.6% in the fourth quarter of 2004.

Operating profit was lower in each of our business units.

Operating profit in the French segment was $10.1 million, a decline of $6.5 million from the prior year quarter.

The decrease in profitability was the result of increased purchased energy, purchased materials, and labor expenses, lower product selling prices, and a decline in production volumes.

Inflationary cost increases accounted for $5.3 million of the operating profit decline.

These unfavorable factors were partially offset by reduced nonmanufacturing expenses and positive exchange rate impacts related to the weaker euro compared with the dollar.

Operating profit in Brazil declined by $1.3 million from the fourth quarter of 2004 to a loss of $500,000.

The strengthening of the Brazilian Real versus the dollar had an unfavorable impact on operating profit of $1.2 million.

The lower profitability in Brazil also reflected inflationary cost increases of $900,000 related to increased wood pulp and purchased energy expenses and lower paper production volumes.

These unfavorable factors were partially offset by increased sales volumes.

Operating profit in the United States declined by $200,000 to a loss of $1.1 million.

Inflationary cost increases had an unfavorable $3.9 million impact in the United States during the quarter.

Significant cost increases were experienced for purchased energy, purchased materials, labor, and employee benefit expenses.

In addition, the shutdown of the cigarette paper booklets business was completed in the quarter.

The booklets operation had an unfavorable impact of $800,000 during the quarter, which included accelerated depreciation for the booklets production equipment.

These unfavorable factors were partially offset by higher average selling prices in the United States primarily due to the mix of products sold, lower research expense, increased paper production volumes, and the absence of paper machine startup costs.

During the fourth quarter of 2004, startup costs totaling $1.1 million were incurred related to the operation of rebuilt paper machines at the Spotswood, New Jersey and Lee, Massachusetts mills.

Interest expense totaled $1.7 million during the fourth quarter, unchanged from the third quarter of 2005, but an increase of $1.1 million compared with the fourth quarter of 2004.

The increase in interest expense compared with the prior year quarter was the result of higher interest rates and increased average debt levels during the quarter.

Schweitzer-Mauduit's effective income tax rate was 37% for the quarter compared with an effective income tax rate of only 10% in the fourth quarter of 2004.

The effective income tax rate in the fourth quarter of 2005 was higher than in previous quarters of the year reflecting higher than expected taxable losses in the United States and the need to provide valuation allowances against certain of the resulting US income tax assets.

The effective income tax rate in the fourth quarter of 2004 benefited from a decrease in the French statutory tax rates that reduced the net deferred income tax liability, our ability to utilize previously reserved foreign tax credits in the United States and the recovery of prior year income taxes in France related to a favorable court ruling.

Minority interest in earnings of subsidiaries decreased by $1 million compared with the prior year quarter.

This decrease reflected lower earnings at LTR Industries, a French subsidiary of the Company, which has a minority owner that owns 28% of its shares.

Net income totaled $2.8 million, a decline of $8.1 million or 74% from net income of $10.1 million in the fourth quarter of 2004.

Diluted earnings per share were $0.19 compared with diluted earnings per share of $0.71 during the fourth quarter of 2004, a 73% decline.

The decline in both net income and diluted earnings per share compared with the prior year quarter was caused by the lower operating profit, increased interest expense, and the higher effective income tax rate, partially offset by a decline in minority interest.

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

This dividend will be payable on March 13, 2006 to stockholders of record on February 13, 2006.

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

Capital spending totaled $5.4 million compared with $5.2 million in the third quarter of 2005 and $12.8 million in the fourth quarter of 2004.

Capital spending for our major strategic projects is 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, was completed in 2005.

Schweitzer-Mauduit is expecting capital spending for 2006 to total approximately $20 million comparable to 2005.

In mid-2005, we announced the 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 producing both cigarette paper and porous plug wrap.

The joint venture is in partnership with the China National Tobacco Corporation, which is the principal operating company under China's State Tobacco Monopoly Administration.

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

In late 2005, governmental approval for the joint venture was obtained and the joint venture legal entity was incorporated.

We are in the process of finalizing project financing and must still obtain various governmental operating permits.

The required approvals are expected to be obtained during the first quarter.

Construction should take approximately two years with mill operations expected to commence in early 2008.

In December, Schweitzer-Mauduit announced that it had reached agreement with Philip Morris USA to continue our strategic supply agreement for fine papers.

The current agreement now extends through December 31, 2008.

This agreement continues our ongoing supply of tobacco-related papers.

The two companies have been operating under a strategic supply agreement since 1993.

Momentum continues to build for lower ignition propensity cigarettes.

As of October 2005, all cigarettes manufactured or imported into Canada must meet lower cigarette ignition propensity requirements.

During the fourth quarter, the State of California passed legislation that requires all cigarettes sold in California as of January 2007 to have lower ignition propensity properties.

California joins the State of New York, which already requires lower ignition propensity properties and the State of Vermont, which requires cigarettes to have these properties as of May of this year.

In addition to these three states, 15 other states introduced bills in 2005 addressing lower ignition propensity properties for cigarettes.

Several states have already initiated action on cigarette ignition propensity legislation in 2006, including Washington, Illinois, New Hampshire, and Alabama.

The Australian government is also reportedly considering legislation that would require cigarettes sold across Australia to be self-extinguishing.

The Australian legislation could be finalized as soon as March of this year and would reportedly require compliance beginning in 2007.

Schweitzer-Mauduit had increased production and sales of cigarette paper for lower ignition propensity cigarettes during the fourth quarter in support of the new regulations in Canada.

Sales of cigarette papers for lower ignition propensity cigarettes are expected to contribute positively to operating results in 2006.

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

Schweitzer-Mauduit's full-year 2005 diluted earnings per share were within the earnings guidance range provided last October, but well below the financial results obtained in 2004.

A year-over-year decline in earnings was largely attributable to four factors.

Inflationary cost increases had an unfavorable impact on full-year 2005 of $24.9 million or $1.05 per share.

Roughly one-half of this amount was related to the increased cost to purchase energy.

As a result of difficult market conditions, we were unable to offset these inflationary cost increases through higher selling prices.

The second factor was the strengthening Brazilian Real that had an unfavorable currency impact on operating profit in Brazil of $4.1 million or $0.18 per share.

The higher effective income tax rate in 2005 had a negative impact of $0.16 per share compared with the prior year. 2004 had benefited from several one-time favorable items.

Interest expense was $2.5 million higher in 2005, reducing earnings by $0.11 per share.

The significant inflationary cost increases experienced in 2005 are expected to continue in 2006 reflected in higher purchased energy, purchased materials, labor and employee benefit expenses.

In 2006, the stronger Real is expected to continue to put pressure on our profitability in Brazil similar to 2005.

Our effective income tax rate is expected to be approximately at the full-year 2005 level.

Interest expense could be marginally higher in 2006 than in 2005, as a result of higher average interest rates.

In addition, continued weakness is expected in Schweitzer-Mauduit sales of conventional tobacco related papers in our French and US operations.

This weakness in tobacco related paper sales is expected to be partially offset by increased sales of reconstituted tobacco leaf products.

With the challenging market conditions and inflationary costs, our earnings are expected to be under pressure during 2006.

Our key challenges and opportunities include the following.

To expand our sales and profitability of reconstituted tobacco leaf products.

To respond to the increasing requirements for lower ignition propensity cigarette papers.

To manage our French and US paper operations to respond to declining cigarette consumption in developed countries and excess worldwide tobacco related papers capacity.

To continue upgrading and expanding our newly acquired operations in Southeast Asia, in the Philippines and in Indonesia.

To successfully implement our joint venture in China.

To expand sales and profitability of non-tobacco papers' niche markets.

To drive costs lower throughout the organization.

And to manage our capital spending at a controlled level with an emphasis on projects that will most immediately contribute to improved earnings.

In this challenging environment, it is likely that earnings per share in 2006 will be in the same range as in 2005.

This will be dependent upon our ability to maintain our operating profit margins.

Updated earnings guidance will be provided when the first quarter 2006 financial results are released in April.

That concludes our planned comments.

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

[OPERATOR INSTRUCTIONS].

Ann Gurkin, Davenport.

Good morning Paul.

Good morning Ann.

I am going to start with your '06 outlook and if you could break out what you are including in that outlook for commodity cost, energy, pulp, and currency in particular?

Okay, our expectation is that on wood pulp, they are likely to be up a little bit over 2005, but not dramatically.

Some producers have announced price increases for February.

Pulp prices in January were flat with the fourth quarter, and there is a possibility that pulp prices could inch up.

The paper analysts, I don't think are really projecting a lot of movement in pulp prices this year.

In terms of currency, our current expectation is that the euro will strengthen a little bit from the current range where it is today roughly, $1.20 will probably inch up a little bit during 2006, as expectation of the interest rates possibly increasing in the EU and probably not a lot of interest rate changes in the US.

In Brazil, there is a possibility of some weakness in the Brazilian Real during 2006.

They do have a Presidential election in Brazil and the last time they had a Presidential election four years ago, that did put pressure on their currency and there was a lot of volatility in their currency, we will have to see how that resolves itself.

What have you put you in your forecast for the Real?

For the Real, we are expecting a modest decline in the Real, in the value of it.

In terms of energy costs, we are expecting energy costs certainly in the next quarter or so to remain approximately at the same level as they are today with possibly a little bit of softening in the summer period, but again not significantly.

Okay.

What is the projected volume for RTL in '06?

We are expecting our RTL volume to increase in '06, probably in the mid-single digits.

Is that more backend loaded versus first half?

It will probably be a little bit more backend loaded.

Okay.

And when we look at the French business, should we still project a decline in the paper profit, offset by growth in RTL or can you help me with that forecast?

I think it is very likely that there will be pressure on our profitability in our French paper operations and we are expecting improvement in our RTL profitability.

And you are going to take down time, can you give us some more detail on that as to where and timings?

Again, I would expect that it would be consistent with what we saw really in the last six months of 2005 and where we have been operating just half of the small cigarette paper machines in France and consistent with the start up of the new paper machine -- cigarette paper machine in Brazil.

We do have lower cigarette paper production at our mill in Spotswood.

So, you are going to take claims down from the first quarter or the first half or--?

The machine operating schedules will probably be consistent throughout the year is our current expectation based on compared to where they are right now.

In the release, you allude a couple of times to cost reduction efforts and operations, I think you talk about how to operate production facilities more effectively, can you comment on that some more?

Yes, again, we have pretty aggressive cost reduction programs, not only on operating costs, but on our nonmanufacturing costs.

As we highlighted, not only were our nonmanufacturing costs down almost $3 million during the quarter, they were down also very significantly by about $6 million for the full year.

We are looking at all opportunities to reduce cost.

We did freeze our salaried pension expenses as of the end of 2005 for our salaried workers in the United States.

There will be no additional benefits accrued there.

We are looking for ways to further reduce our benefit costs in the United States; we feel that will be critical.

We are also looking at optimum machine schedules and what we think would be best in terms of improved operations.

We also did see across all of our mills improved productivity and waste in 2005 and that is an area that we are focusing on.

What point in the US do you reach -- when do you reach the point in the US where you just need to take capacity out?

If you can't bring labor costs down anymore and pension costs are--?

We did reduce our operating schedules in Spotswood, where we have seen the most significant volume decline in cigarette paper and we believe really the machines that we have right now are the ones that will be operating going forward.

One of the other considerations is that there is -- as there is more of a move to lower ignition propensity cigarette papers, some of that product does have lower productivity on our machine so that does effect the demand for our machines.

Right.

And you also talk about trying to reduce the cost of producing the lower propensity paper; is that because you are getting pricing pressure from customers or are you just looking for efficiencies?

Looking for efficiencies, and again, it is still a relatively new process for us and as we get additional volume and gain additional experience, our expectation is to become more efficient in manufacturing that product.

Okay.

That is great right now.

Thank you.

Thank you Ann.

Jonathan Lichter, Sidoti.

Hi Paul.

Good morning Jonathan.

Good morning.

Just another question about the progress that you have made in getting price increases from customers?

I would say that we've had some progress in getting higher pricing in 2006 in each of our business units.

Certainly not enough pricing to offset the inflationary pressures that we have seen.

We were expecting to get a little bit more pricing than we did get, but we were able to get some pricing across each of our business units, and that is something that we will continue to look for opportunities to get further pricing throughout 2006.

Do you think there is a reasonable chance that you will get some additional increases there?

I think it's uncertain at this point, but again, we will see what we are able to accomplish.

And, also just one last question about the booklets.

Do you expect any further costs from the closure of that business?

No, we don't.

We exited that business in the fourth quarter.

It was a marginally profitable business for us and we did incur one-time costs getting out of that, but that is behind us now.

Dennis Scannel, Rutabaga Capital Management.

Follow-up on the pricing question, was there -- part of what I think you and Wayne were talking about during last year was that in the '06 price negotiations, you might also look to change some of the terms, quickly getting some relief, maybe on -- or maybe tying part of the price to different indices, maybe tracking things like that for gas costs.

Has there been any movement there or is it still pretty much you guys, except for say, Philip Morris in North America, you guys assume the raw material and energy cost risk?

One of our major focuses in our pricing negotiations in late 2005 for 2006 was to highlight the significant impact of energy costs across the board in all of our operations.

Energy was right at half of the total inflationary pressure that we had for 2005 and increased our costs by more than $12 million for the full year.

So, we did try very hard with all of our customers to try to get pricing changes that did reflect the increase in energy costs.

I would say that we had mixed results with that.

We had some situations where we were able to get better pricing where the customer recognized the significant cost pressures.

There were others where we were not as successful in getting the increases.

I would say for the most part our pricing is still one where we do not have adjusters specifically for energy.

To continue along that line, just tracking, say natural gas costs, natural gas costs spiked in the fourth quarter and have come down pretty significantly in the first quarter, at least, kind of on a year-to-date basis.

So, would we expect to see a positive, at least, a sequential comparison for you guys on energy costs?

I guess I am just not sure how much you guys are tied to just electricity versus things like natural gas.

Again, I think to give you a little bit of a sense.

Energy costs, again, as we talked about, have historically run about 10% of our total cost of sales.

Last year, they went up to about 12% of our total cost of manufacturing with the higher energy cost.

For the corporation as a whole, purchased electricity last year was about 49% of our total energy bill.

Natural gas was about 29% of our total energy bill and fuel oil was about 22%.

You certainly do not see near as much fluctuation in the electricity, the purchased electricity cost, but there I would say there is a little bit of a lay effect for that 49% of what we purchase.

Typically, utilities, it takes a while for them to get price increases authorized and I would say that our electricity costs were higher in the year, certainly than they were in the beginning of the year, and that especially was probably more back-end loaded.

Natural gas at 29% does tend to be a little bit more variable as does fuel oil at 22%, and those both do reflect the marketplace a little bit.

I'd say kind of as a generalization though the energy costs increased throughout the year, throughout 2005 and were certainly the highest at the end of the year than they were earlier in the year.

So, we are going to have a negative impact on energy even if they stayed about where they were year-over-year until we effectively anniversary the increase in the energy costs.

So, it's unlikely that we would really see because of that anniversary effect probably not really seeing a dip in the impact of energy in the first quarter.

But you guys are pretty much a spot buyer, you are not out hedging, are you?

I guess on electricity you would have longer-term contracts, but on natural gas and fuel oil, are you guys buying forward contracts or anything like that?

Historically, we have in the past tried certainly on natural gas to lock in a certain percent of our purchases, at least in North America.

We really only use natural gas in North America and France, not in our other locations, and when natural gas prices went up as quickly as they did, we kind of sat on the sideline to see if they were going to be coming back down and that wasn't a good bet at that time, or in hindsight.

We have with energy costs going up as much as they have, we have started to purchase a little bit more of our energy on a forward basis with a little bit longer contracts so that we are not quite as unexposed as we were in 2005.

That's both on the natural gas and the fuel oil side or --?

I would say largely on the natural gas.

And percent -- just generally speaking, a percentage of your position that's hedged?

And can you say like at what cost or --?

I really wouldn't be able to comment on either of those specifically, Dennis, as far as what percentage.

Okay, fair enough.

Just a couple of other quick things.

So, for 2005, was RTL volume in France, was that down versus 2004?

For the full-year, it actually ended up being down a little bit.

Just down a little bit, and you are expecting that will go up in mid-single digit?

Yes.

And could you say about roughly what portion of your production in the fourth quarter of '05 was LIP cigarette paper in the US?

Well, what I would say is that right now in the United States, I guess in North America, probably about 8% of the total demand for cigarette paper is lower ignition propensity.

And then when California kicks in, in January of next year, that should go up more in the, say, about the 12% range.

Okay, that's helpful.

And then, one last thing.

The 20 million for capital spending in '06, does that include the China joint venture?

No, it doesn't.

The China joint venture would not really run through our books as capital spending.

As we said before, that's about a $100 million project and it will be financed roughly one-third equity and two-thirds debt.

So, our equity portion would be roughly one-third of 50 million or about $17 million.

So, we would be injecting our share of that equity of 17 million over the next two years relatively evenly between 2006 and 2007, and that will be identified as a separate line item of equity investments and subsidiary.

So, we will break that out separately and you will be able to see that.

Great.

And one last thing that just occurred to me on pricing, how optimistic are you that you might get a little price relief during '06?

I was really under the impression that you guys kind of have annual contracts and the price is the price and, particularly if you don't have adjusters in them, do you think some of your customers will be open to separate talks, you know, part way through the year?

I would say that certainly the majority of our pricing is pretty well locked in for 2006, certainly much more than half of it, that maybe a third or two-thirds or three-fourths of it, in that range.

But there is still some pricing -- some tender business or other smaller pieces of business.

And in the past where there have been significant pressures on margin and cost increases, we have gone forward and in some cases have gotten some pricing.

So, it's difficult to say at this point; it will depend upon a lot of factors, but there is still an amount of pricing that isn't locked in for the full year.

Great, thanks a lot, Paul.

Sure, thank you.

Don Noone, VN Capital Management.

Yes.

It seems that if you are not meeting with success, getting energy adjusters into your contracts and you are not – and you are hedging only modestly, that energy prices kind of stay at this level for a longer period of time, then we could see diminished profitability through 2007, 2008.

Could you comment on what you are actually doing to meet with some success in combating energy prices?

We are, as we mentioned, there are several things that we are doing from a cost saving standpoint; there are several things in terms of energy management and energy conservation that we are doing.

We did start up in the fourth quarter of last year, a small cogeneration facility at one of our mills in France and a second one will be starting up in France later in the fourth quarter of this year.

Those will -- those measures will help certainly not enough to offset the significant increases we have had.

The other offset, we would expect to come from other cost savings in the operations.

So, there is nothing actually related to offsetting the price increases?

You kind of seem to be dabbling at the margins and not really have a core strategy to address this?

In terms of getting, again specifically offsetting the energy costs, nothing specific other than what I mentioned.

Okay.

Thank you.

Okay.

Thank you.

Thomas Russo, Gardner, Russo & Gardner.

Just a second.

Hello?

Hello, Tom.

Hi, Paul.

Could you spend a second talking about changes underway at the French operations?

I know that there has been some management change and talk about plans for new managers to possibly have a competitive response to that excess capacity that you referred to in traditional cigarette paper?

And then also steps that they may have under way to drive, RTL volumes in '06; and to that extent what might have been the factors for the soft RTL volumes in '05?

Can you refer to sort of the management changes versus France along those two lines?

Sure.

We did make an announcement in the fourth quarter that Jean-Pierre Le Hetet who is located in France and is the Chief Operating Officer of the company and has been so since 1998, will be retiring as of February 1 of this year.

Jean-Pierre is being replaced by Frederic Villoutreix who joined us in early December.

Frederic has a lot of experience in process industries.

He has worked in companies and in joint ventures literally in each of the countries that we have operations including China, Brazil, France, the United States and has a very strong background.

We are in the process of transitioning those two individuals right now.

Frederic brings a lot of experience to us and we are looking forward to having a fresh perspective from Frederic.

Thierry Bellanger is the President of our French operation and he has been in that position for several years and I think he provides good, stable management to the French team.

One of the things that we did mention in the press release is that we are looking at how to best optimize our production in both France and the US with pressure on our volumes and we are looking in particular for products that we manufacture at more than one location.

For example, our mill at Saint-Girons and our mill in Quimperle in France that both make cigarette paper, looking at being more aggressive to -- look at ways to best utilize and optimize the capacity of the two machines and how to best load those machines.

And that's a plan of attack for how long, Paul?

How soon could you start to see some benefits from those two plants working more thoughtfully together?

I think this is something that we have -- we are going to be, where we have been looking at for several months and we will probably be wrapping a lot of that up in the first and second quarter and try and determine what's the most effective way to operate those facilities to improve our cost situation.

Great.

Thank you.

You talked about building a global sourcing strategy and in Brazil right now we face the Real and in the US I gather you have made advances in your cost effectiveness here and plus you've got the Asian plant.

How will you use your global sourcing?

How free are you to use it to offset the pressure that you see for example in Brazil due to the Real?

Are you able to start to shift Asian paper to those customers in lieu of Brazilian paper?

Are you able to get the benefits yet from that new platform?

I think we are making progress in that regard, Tom.

One of the major reasons for us for installing the new cigarette paper machine in Brazil that started up in January of 2005 was to move wood cigarette paper to our Brazilian operation from the US and have our mill at Spotswood, New Jersey focus more on flax cigarette paper; that has been successful.

We have seen improvement in our cost in both locations by having the Spotswood operation just focus on flax cigarette paper and not wood cigarette paper.

And even with the Real where it is for cigarette paper that still makes sense for us in Brazil.

We are in the process of qualifying various customers and to a large extent we have been pretty successful in shifting volume already to Brazil.

In the Philippines and in Indonesia, at this point, we have got limited capacity in Asia.

Our Indonesian operation is still focused just on Indonesia and we are running -- everything that we manufacture there is being supplied in that market.

We probably have more opportunity out of our Philippine operations, but that we just acquired on June 30 of last year and we are making progress in upgrading the quality and the productivity of that equipment, and I think down the road, we will be in a better position to source out of our Philippine operations.

We've got a quite a bit more capacity possible there than we do in our Indonesian operation.

Thank you for that.

Last question.

On China, though the physical plant won't be up and running until 2008, let us say, what opportunities do you have as a partner and as a supplier to bring in products through your now official joint venture relationship into the market before then, in a different fashion than you have been able to do before?

We have been selling product in China for almost 20 years at this point and have pretty good relationships with a lot of the customers in the market.

I think the fact that we have been working toward this joint venture probably has helped to contribute to us maintaining the business that we have in China.

And one of the things we have been talking with our partner about is whether or not we could expand that, and possibly in fact in a way pre-sell some of the capacity in China.

But, again, it would be really premature to say anymore on that.

So, it is a possibility, but nothing firm, yet?

Right.

It is something that we have talked about.

Great.

Assuming that your capital spending plans are going to remain fairly modest going forward as you described, what are plans for free cash flow, priorities for the free cash flow?

At this point, and again because of our current bank covenants although we are not going to be -- the debt in China will not be on our books, but we still have to work through whether or not we'll have to be guaranteeing that debt or how it will be reflected.

And we will probably wait until we get that all sorted out and try to maintain a little bit of a conservative capital structure until we have some of that spending in China behind us.

If we do have excess cash available to us, again depending upon the price of the stock, our first priority would be share repurchase and again, we'd consider in the future possible dividends if cash provided was available.

Thank you Paul.

Thanks Tom.

[OPERATOR INSTRUCTIONS].

Ann Gurkin, Davenport.

Hi Paul.

Hi Ann.

One more question.

There was a blurb about China, the CNTC further consolidating forming ten major conglomerates, has that impacted you all?

I don't think so Ann.

I think that has been expected and that is really a continuation of what China has been doing trying to have their cigarette industry more competitive.

They are trying to get larger facilities and they also want to consolidate their brands a little bit more.

I would hope that that would contribute to a push toward higher quality cigarettes, which again, hopefully would result in demand for higher quality papers.

Okay.

Great thanks.

Thanks Ann.

At this time there are no further questions.

Mr. Roberts, are there any closing remarks?

No, thank you Sushanta.

And I'd like to thank everybody for taking the time to join us today.

Good bye.

Thank you.

This concludes today's conference call.

You may now disconnect.