Mativ Holdings Inc (MATV) 2006 Q1 法說會逐字稿

The Schweitzer-Mauduit conference call will begin momentarily. My name is Julie Ann, and I'll be your conference operator today. At this time I'd like to welcome, everyone to the first quarter 2006 earnings for Schweitzer-Mauduit International. 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, Julie Ann. Good afternoon. I'm Paul Roberts, the Chief Financial Officer of Schweitzer-Mauduit International. With me is Wayne Grunewald, our Corporate Controller. Thank you for joining us for our review of our first quarter 2006 financial results.

Our conference call is later in the day than is typical, because of a Board of Directors and the annual shareholders meeting that were conducted earlier today. Various comments or remarks that we may make during today's conference call, constitute forward-looking statements within the meeting 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-ended December 31, 2005.

Prior to a detailed discussion of our financial results, I will review the highlights of the quarter. Diluted earnings-per-share were $0.30 compared with diluted earnings-per-share of $0.32 in the first quarter of 2005, a decline of 6%. Operating profit was $9 million, a decline of $600,000, or 6% from the prior year quarter.

The Company's gross profit margin was 14.6%, compared with 15.0% in the prior year quarter. The decline in profitability compared with the first quarter of 2005, was the result of the inability to fully offset inflationary cost increases, and unabsorbed fixed costs to improve mill operations or higher selling prices. Inflationary cost increases unfavorably impacted operating results by $5.9 million in the quarter, or roughly $0.24 per share. Unabsorbed fixed costs increased operating expenses by $3.4 million.

Significant operational improvements were achieved in each of our business units. Net sales totaled $165.4 million, 3% above the prior year quarter, due to increased sales volumes, and higher average selling prices. Capital spending totaled $1.6 million compared with $3.5 million spent during the prior year quarter.

I'd like to now provide a more detailed review of our first quarter financial results and our outlook for the balance of the year. Net sales at $165.4 million were an increase of $4.8 million, or 3% compared with the first quarter of 2005. Unit sales volumes increased by 4% compared with the prior year, and had a favorable $5.6 million impact on net sales.

Excluding sales volumes from our operation in the Philippines, which was acquired in June of last year, unit sales volumes would have increased by 1%. Sales volumes in our Brazilian business improved by 10%, compared with the first quarter of 2005. This improvement was the result of increased sales of tobacco-related papers primarily in export markets.

Sales volumes for the French segment increased by 4% from the prior year quarter. Sales volumes increased for reconstituted tobacco leaf products, and for tobacco-related papers in both the Indonesian and Philippines operations. Sales volumes were lower for tobacco-related papers in France. Sales volumes in the United States increased by 1%. Higher sales of tobacco-related papers were partially offset by lower sales of commercial and industrial products. The increased sales volumes included an increase in the sale of cigarette paper for lower ignition propensity cigarettes.

Higher average selling prices had a favorable $4.2 million impact on the net sales comparison. Higher average selling prices in the United States were partially offset by lower average selling prices in our French operations. The increase in average selling prices in the United States was primarily attributable to a change in the mix of products sold.

Changes in currency exchange rates decreased net sales by $5 million, or 3% compared with the prior year quarter. The Euro was approximately 10% weaker versus the dollar, accounting for the negative impact. During the quarter, the Brazilian Real was approximately 21% stronger versus the dollar, partially offsetting the impact of the weaker Euro on the net sales comparison.

Gross profit was $24.1 million, unchanged from the prior year quarter. The gross profit margin was 14.6% improving from 12.9% in the fourth quarter of 2005, but below the 15.0% in the first quarter of last year. Gross profit was unfavorably impacted by significant inflationary cost increases and lower production volumes. These negative factors were largely offset by improved mill operations, the increased sales volumes, and the somewhat higher average selling prices.

The inflationary cost increases unfavorably impacted operating results by $5.9 million in the quarter. Purchased energy costs alone increased by $4.7 million compared with the first quarter of 2005. Higher energy costs were experienced in all business units related to higher electricity, fuel oil, and natural gas costs.

Changes in labor rates increased manufacturing expenses by $600,000 during the quarter. Inflationary increases for purchased materials other than wood pulp, unfavorably impacted operating results by $400,000, largely due to increased chemical costs. Changes in the per ton cost of wood pulp increased our operating expenses by $200,000.

The higher wood pulp costs were experienced in our Brazilian operation, related to increased cost for hardwood pulp. The list price of Northern Bleached Softwood Kraft pulp, or NBSK, a bellwether pulp grade, averaged $655 per metric ton in the United States during the quarter, compared with $670 per metric ton in the first quarter of 2005, and up from $640 per metric ton in the fourth quarter of last year.

The world pulp market did tighten during the quarter with higher world pulp shipments and increasing pulp prices. The list price of NBSK in the United States increased from $640 per metric ton in January, to $660 per metric ton in February. An additional $30 per ton increase to $690 per metric ton was announced for April. Pulp prices could increase further during the year.

Although new market pulp production capacity is being added, greater demand from China, and the closure of formerly integrated pulp mills, are helping to keep the market in balance. Pulp mill operating rates continue to be high on a global basis, and market pulp inventories have been slightly below average historical levels.

During the quarter, reduced paper machine operating schedules and lower production volumes were experienced in our U.S. and French operations. This resulted in unfavorable fixed cost absorption impacts that increased operating expenses by $3.4 million. These unfavorable inflationary and unabsorbed fixed cost impacts were partially offset by improved mill operations.

Significant operational improvements were achieved in each of our business units, through increased productivity and reduced waste. Non-manufacturing costs were $600,000 more than the prior year quarter, an increase of 4%. Lower selling and research expenses were more than offset by higher general expense. The increase in general expense was the result of higher employee compensation expenses, the addition of non-manufacturing costs for our operation in the Philippines, which was acquired mid-year 2005, and costs associated with implementation of our joint venture in China.

Non-manufacturing expenses were 9% of net sales in the first quarter, the same as in the prior year period. Operating profit was $9 million, a decline of $600,000, or 6% compared with the first quarter of 2005. Operating profit return on sales was 5.4%, compared with 6% in the first quarter of 2005. Operating profit was lower in our French and Brazilian business units, but increased significantly in our U.S. operations.

Operating profit in the French segment was $8.4 million, a decline of $2.4 million from the prior year quarter. The decrease in profitability was the result of increased purchased energy, purchased materials and labor expenses, and a decline in production volume. The inflationary cost increases reduced operating profit in France by $2.8 million. These unfavorable factors were partially offset by improved mill operations and positive exchange rate impacts, related to the weaker Euro compared with the dollar.

Operating profit in the United States improved by $2.9 million, and totaled $2.5 million for the quarter. The improvement in profitability reflected significant improvement in mill operations, increased sales volumes, somewhat higher average selling prices, which resulted primarily from an improved sales mix and lower non-manufacturing expenses. These positive factors were partially offset by inflationary cost increases in the United States, that had an unfavorable impact of $2.3 million in the quarter. Primarily tied to higher purchased energy costs.

Operating profit in Brazil declined by $100,000 from the first quarter of 2005 to an operating profit of $200,000. 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 $800,000, primarily related to increased wood pulp and purchased energy expenses. These unfavorable factors were almost totally offset by better mill operations and increased sales volumes.

Interest expense totaled $1.4 million during the first quarter, an increase of $100,000 from the prior year quarter. Total debt declined slightly during the quarter, and our total debt-to-capital ratio stood at 26% at March 31, compared to 27% at the end of December. Other income net was zero for the quarter, but a decline of $600,000 from the first quarter of 2005. The prior year quarter benefited from a gain on the sale of property in Indonesia.

Schweitzer-Mauduit's effective income tax rate was 26% for the quarter, compared with an effective income tax rate of 29% in the first quarter of 2005. Minority interest and earnings of subsidiaries decreased by $300,000, 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 $4.6 million, a decline of $400,000, or 8% from net income of $5.0 million in the first quarter of 2005. Diluted earnings-per-share were $0.30, compared with diluted earnings-per-share of $0.32 during the first quarter of 2005, a 6% 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 and the reduction in other income, partially offset by the lower effective income tax rate, and the decline in minority interest.

Earlier today, at our Annual Meeting of Shareholders, Schweitzer-Mauduit announced a quarterly common stock dividends of $0.15 per share. This dividend will be payable on June 12 to stockholders of record on May 15. The Company has paid quarterly dividends of $0.15 per share since 1996.

Capital spending totaled $1.6 million compared with $3.5 million in the first quarter of 2005. Capital spending for our previously announced major strategic projects is behind us. During the first quarter of last year, $400,000 was spent in Brazil to complete installation of a new cigarette paper machine. Schweitzer-Mauduit is expecting capital spending for 2006 to be in the range of 20 to $25 million.

In mid-2005, 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, 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.

In late 2005 governmental approval for the joint venture was obtained, and the joint venture legal entity was incorporated. Various governmental licenses and permits have now been obtained. The management team for the joint venture has been selected, and detailed engineering is in process. Construction should take approximately two years, with mill operations expected to commence in early 2008.

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 of 2005, 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 2006.

In addition to these three states, eight additional states introduced legislation during the first quarter, addressing lower ignition propensity properties for cigarettes. Nine other states carried over proposed lower ignition propensity legislation from 2005, increasing to 17 the number of states with current active legislation. The states of Illinois and New Hampshire are furthest along in advancing their proposed legislation. The legislation in Illinois has passed both houses of its Legislature and is currently aisle waiting the Governor's signature.

Outside of North America, Australia is the most active jurisdiction working on possible lower ignition propensity legislation. During March, an Australian Task Force adopted the same test standard currently used by Canada and the State of New York, and drafted it as an Australian standard. Legislation could be implemented in Australia later this year, which would reportedly require compliance beginning in 2007. Schweitzer-Mauduit had increased production and sales of cigarette paper for lower ignition propensity cigarettes during the first 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. With increasing sales volumes of this cigarette paper, we are achieving improvement in our manufacturing costs for these products. The significant inflationary cost increases experienced in 2005 are continuing in 2006, reflected in higher purchased energy, purchased materials, labor and employee benefit expenses. The per ton cost of wood pulp has also recently increased, and is expected to be above the prior year level for the full year.

These inflationary costs increases are expected to have an unfavorable impact on the year of approximately $20 million, or roughly $0.80 per share. With approximately $15 million of this amount related to higher purchased energy costs.

We also continue to experience weakness in the sale of conventional tobacco-related payments. Reduced demand for tobacco related products in Western Europe and the United States, has caused us to have continuing excess production capacity, and increased paper machine downtime. The unfavorable impact of this downtime reflected in unabsorbed fixed costs is expected to increase our operating expenses during 2006, by roughly $10 million, or approximately $0.40 per share.

Management is evaluating how to operate our production facilities in France and United States more effectively with the reduced tobacco-related paper volumes. During the first quarter, decisions were made to recognize accelerated depreciation on certain production equipment in both countries.

This accelerated depreciation, as well as related employee severance costs in the United States, is expected to total approximately $1.6 million this year. Although analysis is ongoing, no further decisions have been made, and we have not committed to any plan beyond the steps already taken. But it does now appear more likely that changes could occur that would require additional write-offs or accelerated depreciation of some production equipment, and could also possibly include associated restructuring charges in France or the United States.

With the current difficult market conditions, significant inflationary cost increases, and the unfavorable impact of reduced paper machine operating schedules in France and the United States, 2006 will continue to be a challenging year. We do expect to largely offset these unfavorable factors, mainly through improved operations in our mills. Increased sales of both reconstituted tobacco leaf products, and cigarette papers for lower ignition propensity cigarettes, are also expected to contribute positively.

As a result, we are currently projecting that earnings-per-share in 2006 will be approximately in the same range as in 2005. Prior to considering the potential impact of any additional downsizing or restructuring activities beyond those initiated in the first quarter. That concludes our planned comments.

Julie Ann, could you please open the phone lines for questions?

[OPERATOR INSTRUCTIONS] Your first question is from the line of Jonathan Lichter.

Hi, Paul.

Good afternoon, Jonathan.

A question on the reconstituted tobacco leaf. It seems like sales were up, but earnings there were down. What happened there?

You're correct. We did have higher volume of reconstituted tobacco-leaf products sales in the first quarter, but our production volume was reduced. We began the year with a higher level of finished product inventory in that business unit than we felt was optimal, and we did reduce our operating schedules for reconstituted tobacco during the first quarter to help reduce inventories.

So it wasn't that you sold the inventory at a lower price. The older inventory.

No, it had more to do with the fact that we did have unabsorbed fixed costs that hit directly to the income statement during the quarter.

Have you sold through most of that inventory?

We still have additional inventory yet that we still need to work off, and I would expect that we would still have some unfavorable impacts of lower production schedules on the reconstituted tobacco business during this year.

And when we commented that the total impact of about $10 million unfavorable expected for the full year, that did include some continuing negatives in the reconstituted tobacco business.

Okay. Also can you give, do you have any timeframe on when you might make a decision on taking down machines in Europe?

It's difficult to say in Europe. As we've said, really in our last couple Qs, and in much more detail in our 10-K for 2005, we are working through different production alternatives. Once we conclude what alternatives we think are most appropriate, there is a requirement in France that we would have to meet with the government, as well as with the labor union, and work through what our plans would be, before actually anything could be finalized.

So we are in the process of working through internally our own assessment, on what we would like to do. But anything that would impact a reduction in the workforce, would require that the two steps, first with the government, and then with the labor union, before we can consider anything really concluded, and that process will take a period of time, yes.

Okay. And lastly, the margin in the U.S. seems like it was one of the highest in the last few quarters. Is that sustainable? Is that directly related to the low ignition papers?

The increased sale and production of the lower ignition propensity cigarette papers, did have a very significant impact on the operating margin during the quarter. In particular, we made extremely good progress in reducing our operating costs in the United States.

In particular, waste levels for the print banded cigarette paper, which is one of the two lower ignition propensity cigarette papers that we sell, as we're getting increased volumes, we are progressing down the learning curve on that, which has been very helpful. We would expect that we would see improvement or continued improvement in the productivity of those products.

Our volume was a little bit heavy in the first quarter. It may not be quite as strong in the second and third quarter for those products, and we'd expect to see the fourth quarter picking up again. So I think it's sustainable, but we may not see it evenly in every quarter of this year.

Thank you.

Thank you, Jonathan.

Your next question is from the line of Ann Gurkin.

Good afternoon.

Good afternoon, Ann.

I wanted to start with your 2006 you say approximately in the same range as 2005.

Correct.

Can you define approximately. Does that mean a little bit less a little bit higher. Are you changing your outlook there?

We're really aren't changing our outlook. We were careful to use the same wording as we did when we released our earnings in the first quarter.

You added approximately in there.

It should be about the same range, and that would really mean in our mind, it could be a little bit under, it could be a little bit over, roughly in that range. There are a lot of factors in terms of reduced operational schedules, in terms of inflationary pressures, but we're really pleased in the progress we've made in all three business units, in controlling costs and in improving our operations.

Okay. And then focusing on the outlook in Europe and France, initially looking for $10 million in expenses, unfavorable impact of downtime, can you breakdown a little bit more what's behind that $10 million number?

The $10 million impact is primarily in western Europe. There is in our French operations, there is a little bit of that in our U.S. operations as well. But really what that reflects is the less efficient use of fixed costs, of overhead expenses on a reduced production base.

So you have less costs of those overhead costs that are really going into the product cost of what you're manufacturing. So the difference really, the unabsorbed fixed costs fall directly to the income statement.

So it really is not raw materials, or whatever. It's really the overhead that is being supported, and that's one of the reasons we're looking at possible restructuring in our operations, to take out some of those types of overhead costs.

And in that outlook on Europe, are you looking for the market to remain weak to decline high single digits, or overall cigarette market?

We saw in western Europe last year in really the five key western European markets, France, Germany, Italy, Spain, and the U.K., a decline roughly in the range of 6%, which was really much more than we had been running in those countries. We are expecting to continue to see continued weakness in western Europe in those five key markets. In the single-digit range in '06, and going forward.

And Paul, it's my understanding that one of your competitors has purchased a new machine, and it's looking to fill to capacity, so in that forecast have you included any kind of competitive pricing pressure, or business shifting to this competitor?

I'm not sure which competitor specifically you're referring to, Ann, but I would say that our outlook does reflect the current very competitive market conditions, and we have tried to be as aggressive as we feel we can in pricing our product, especially in western Europe, to the point where it has cost us sales volumes, and, you know, we again believe that our outlook does reflect the current competitive environment.

Okay. What is the outlook for RTL volume for the full year?

We expect RTL volume to be up over last year. In the low to mid-single digit range.

Okay. And what's the tax rate for the year?

We typically will book our taxes as we go throughout the year, consistent with what we expect the full-year tax rate to be. So again, we had a tax rate of 26% in the first quarter, and based upon our current outlook for the year, we'd expect it to be in that range.

Great, thanks, Paul.

Thank you, Ann.

[OPERATOR INSTRUCTIONS] There are no further questions.

Okay. Thank you, Julie Ann, and I'd like to thank everyone for joining us today for our conference call. Good-bye.

This concludes today's first quarter 2006 earnings for Schweitzer-Mauduit International. You may now disconnect.