Mativ Holdings Inc (MATV) 2007 Q1 法說會逐字稿

My name is Brandy, and I will be your conference operator for today. At this time, I would like to welcome everyone to the first quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS] Mr. Thompson, you may begin your conference.

Thank you, Brandy. I am Peter Thompson, Chief Financial Officer of Schweitzer-Mauduit International. With me are Wayne Gruenwald, our Corporate Controller, and several executive officers of the company. Thank you for joining us for a review of our first quarter 2007 financial results. I will be leading our conference call today. Various comments and remarks that we 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 or the SEC reports, including the company's annual report on Form 10-K for the year ending December 31, 2006.

Prior to a detailed discussion of our financial results, I will review the highlights of the quarter. For information regarding our 1st quarter results, please refer to the press release we issued today that is also filed with the SEC on Form 8-K. The diluted earnings per share were $0.27, compared with diluted earnings per share of $0.30 in the 1st quarter of 2006. Restructuring expenses of $2.7 million, or $11 per share were incurred during the 1st quarter of 2007 while restructuring expenses of $500 thousand or $0.02 per share were incurred during the 1st quarter of 2006.

The diluted earnings per share without restructuring expenses would have been $0.38 per share for the quarter, a 19% increase over the 1st quarter 2000 results which also excluded restructuring expenses. Net sales totalled $170.3 million, 3% above the prior year quarter, due to favorable currency impacts and somewhat higher average selling prices including an improved mix of products sold, partially offset by changes in sales volumes. Operating profit was $9.1 million essentially unchanged from $9 million in the first quarter of 2006. Excluding restructuring expenses realized in both 2007 and 2006, operating profit would have been $11.8 million for the first quarter 2007, an improvement of $2.3 million or 24% from the prior year quarter.

The company's gross profit margin which does not include restructuring expenses was 16.6% compared with 14.9% in the prior year quarter. Results during the first quarter reflect improvement in several areas of our business including less production downtime in the French Reconstituted Tobacco Leaf Business, the benefit of improved results from the production and sale of cigarette paper for lower ignition propensity cigarettes, an increase in average selling prices, and improved cost performance including benefits from restructuring activities initiated in 2006. Inflationary cost increases and unfavorable fixed cost absorption partially offset these improvements but to a lesser extent than experienced throughout 2006.

We are encouraged by the first quarter results which benefited from the implementation of our business plan. We remain committed to our previously announced strategy for restructuring our French and U.S. business to better balance capacity to available demand. An accelerating pace of sales growth is expected for cigarette paper used in lower ignition propensity cigarettes and increased demand has been experienced for reconstituted tobacco leaf products.

Additional progress is anticipated in cost reduction activities underway across our business units and the benefits from these actions are expected to further offset the combined negative impact of inflationary cost increases and lower production volumes on operating profit.

Before providing a more detailed review of our first quarter financial results and our outlook for next year, for the coming year, I will discuss our restructuring activities. We initiated restructuring activities during 2006 which are expected to substantially improve the company's competitiveness and profitability in France and the United States.

In France we communicated the strategy to become a low cost and the highest quality cigarette and long fiber paper manufacturer in Western Europe. This plan includes capital investments of $23 million as well as work force and paper machine restructuring activities at the largest of our company's three French paper operations, (Inaudible) or PDM located in Kemper Lake, France The restructuring activities also include actions at the Lee, Massachusetts facility. As a result of the restructuring, workforce levels at PDM will be reduced by 209 employees through the course of 2007.

We began implementing the first reduction phase totaling 64 employees, associated with reduced machine operating schedules and other organizational changes late in the first quarter of 2007. The remaining reductions are now expected to recur progressively through the balance of this year, with the final decreases during the fourth quarter coincident with implementation of the announced capital investments. The PDM restructuring plan is expected to result in the shutdown of two cigarette paper machines during 2007.

Total severance related and other cash expenses from the restructuring in France are now expected to be approximately $2 million lower than previous estimates of 23 to $25 million, due to a greater number of voluntary versus involuntary separations then planned. Restructuring expenses totaling $2.7 million associated with these actions were recognized during the first quarter of 2007. Versus $500,000 during the first quarter of 2006.

Restructuring expenses in France totaled $2.4 million during the first quarter, related to future cash severance payments and accelerated depreciation of fixed assets. Restructuring expenses in the United States totaled $300,000 in the first quarter, related to noncash accelerated appreciation of fixed assets. Total PDM restructuring expenses are now projected to be $8 million for 2007. Including cash severance and other related costs of $7 million.

The PDM work force reductions are expected to generate annual pre-tax labor savings of approximately $14 million or $0.58 per share due to both restructuring activities and planned capital investments. Realization of the majority of the labor savings is now expected to occur by the end of 2007. We expect to realize annual pre-tax benefits greater than $14 million upon full implementation of all elements of the PDM strategy, including the planned capital investments.

I will now cover details of the first quarter business results. Changes in the euro and Brazilian real relative to the dollar benefited the net sales comparison by $6.7 million compared with the prior-year quarter. The euro and Brazilian real strengthened by 9.5% and 4% respectively.

Higher average selling prices in all business segments, primarily attributable to an improved mix of products sold, had a favorable $5.4 million impact on the net sales comparison. Changes in unit sales volumes had an unfavorable $7.2 million impact on net sales.

By segment, sales volumes decreased 13% in the United States while increasing 2% in France and 10% in Brazil. Sales of tobacco-related fine paper declined in both the United States and French segments while increasing in Brazil. Sales volume of reconstituted tobacco leaf increased primarily in Eastern Europe and Asia.

Gross profit was $28.3 million, an increase of $3.7 million from the prior-year quarter. The gross profit margin was 16.6% increasing from 14.9% in the first quarter of 2006. Improved mill operations primarily caused the increase in gross profit. The improvements reflect cost reduction activities across all business units including the benefit of restructuring activities.

Additionally, gross profit increased from the sale of cigarette paper used for lower ignition propensity cigarettes. Higher selling prices primarily caused by an improved mix of products sold and changes in sales volume increased gross profit by $2.9 million during the quarter.

Inflationary cost increases, primarily related to purchased wood and text till pulp and labor rates unfavorly impacted gross profit by $2.7 million in the quarter. Changes in per-ton wood pulp costs increased operating expenses by $2 million compared with the prior quarter. High labor rates increased manufacturing expenses by $600,000 during the quarter. Purchased energy costs decreased slightly compared with the first quarter of 2006.

The primary source of inflationary cost increase during the first quarter was from purchased wood pulp cost. The average list price of northern bleached soft wood craft pulp in the United States was $790 per metric ton during the first quarter of 2007. An increase of 21% compared with the first quarter of 2006 and 3% compared to the fourth quarter of 2006.

We anticipate a further $20 per metric ton or 2.5% list price increase during the second quarter of 2007. Purchased energy costs were essentially unchanged between the first quarters of 2007 and 2006. By business segment, electricity rates declined in France and Brazil while increasing in the United States.

Natural gas and fuel oil increased in France while declining in the United States and were unchanged in Brazil. This variable pattern of changes in purchased energy costs reflects both stabilizing worldwide pricing as well as the effect of our buying policies. The unabsorbed fixed cost caused by lower production volumes primarily experienced in our French paper operations had an unfavorable impact on gross profit of $900,000.

Machine operating schedules were improved in our French reconstituted tobacco leaf operations and in the United States during the first quarter of 2007. Inflationary cost increases and the unfavorable earnings impact of machine downtime in 2006 totaled approximately $1.50 per share.

During the first quarter of 2007, these two items reduced earnings by approximately $0.15 per share, 60% below the rate of last year. Nonmanufacturing cost increased $1.4 million versus the prior-year quarter, an increase of 9%.

General expense increased primarily due to higher employee compensation, only minimal incentive compensation was incurred in 2006 due to lower overall financial performance, whereas 2007 expenses reflect expectations for more normal levels of incentive achievement. Nonmanufacturing expenses were 9.6% of net sales in the first quarter, an increase from 9.1% in the prior year period. Operating profit was $9.1 million, essentially unchanged compared to the operating profit of $9 million in the first quarter of 2006. The operating profit return on sales was 5.3% during the first quarter of 2007, compared with 5.4% in the first quarter of 2006.

Excluding restructuring expenses, operating profit would have been $11.8 million for the first quarter of 2007, an increase of 24% from 9.5 million for the first quarter of 2006. Excluding restructuring expenses, operating profit increased in the U.S. and French business units and was unchanged in the Brazilian unit.

Operating profit for the French segment totaled $7.2 million during the quarter compared with an operating profit of $8.4 million during the first quarter of 2006, a decline of 1.2 million or 14%. Excluding increased French restructuring expenses of $2.2 million, operating profit increased by $1 million or 12%. Lower production costs due to improved mill operations, including the initial benefit of restructuring activities, and decreased nonmanufacturing expenses increased operating profit.

Changes in sales volumes and improved average selling prices, primarily related to an improved mix of products sold, increased operating profit by $1.6 million. Unfavorable fixed cost absorption decreased operating profit by $1.1 million from continuing machine downtime in the French paper business, partially offset by improved capacity utilization in the French reconstituted tobacco leaf business. Inflationary cost increases reduced operating profit by $1.5 million, primarily due to higher purchased wood and text till pulp costs.

The U.S. business unit operating profit was $4.5 million for the quarter, a 2 million-dollar increase versus the prior-year quarter. U.S. restructuring expenses of $300,000 were unchanged from the prior year. Improved mill operations and higher average selling prices resulting primarily from an improved sales mix that included increased sales of cigarette paper for lower ignition propensity cigarettes caused U.S. operating profit to increase.

Inflationary cost increases had an unfavorable impact of $900,000 during the quarter primarily related to purchased wood pulp costs and labor rates. The Brazilian business unit had a $200,000 operating profit during the first quarter of 2007, unchanged from the prior year quarter.

Improved mill operations fully offset the impact of inflationary cost increases primarily associated with purchased wood pulp and a stronger Brazil real versus the U.S. dollar. Interest expense totaled $1.3 million during the first quarter, a decrease of $100,000 from the prior year quarter. Net debt increased $7.2 million or 9%, since December 31st, 2006 but declined by $12.6 million compared to the end of the first quarter of 2006.

Our total debt-to-capital ratio stood at 23% at the end of March 2007, unchanged from the end of December 2006 and lower as compared to 26% at the end of the March 2006. The effective income tax rate during the first quarter of 2007 was 4% compared to 26% during the first quarter of 2006. Minority interest in earnings of subsidiaries increased by $700,000 or 70% compared with the prior-year quarter. This increase reflected improved earnings at LTR industries, a French subsidiary of the company, which has a minority owner that owns 28% of its shares. The loss from equity affiliates representing Schweitzer Mauduit's 50% share of the preoperating expenses of our recently formed joint venture in China was $100,000 during the first quarter.

Net income totaled $4.2 million compared with net income of $4.6 million during the first quarter of 2006, a decline of 9%. The diluted earnings per share were $0.27 compared with diluted earnings per share of $0.30 for the prior-year quarter, an increase of $2.2 million in restructuring expenses contributed to the decline in both net income and diluted earnings per share compared with the prior-year quarter. Excluding restructuring expenses, the diluted earnings per share would have been $0.38 for the first quarter of 2007 and $0.32 for the first quarter of 2006, an increase of 19%.

I will now cover cash flow items and the payment of dividends. Capital spending was $9 million during the first quarter of 2007, compared with $1.6 million during the prior-year quarter. Capital spending for the restructuring related investments at PDM totaled $700,000 while spending for the rebuild of a paper machine in Brazil totaled $1.3 million, both of these projects are proceeding on schedule and are expected to be complete and commence operations during the fourth quarter of 2007. Capital spending for 2007 is still expected to be in the range of $55 to $65 million, including the $23 million capital investment at PDM and the $9 million paper machine upgrade in Brazil.

Additionally, spending for capitalized software totaled $2.5 million during the first quarter of 2007, primarily for a project in France and is expected to total $6 to $8 million for the full year. The software project in France is to install an ERP system, it is now expected to begin operating during the second quarter of 2008. Pension contributions during the first quarter of 2007 totaled $2 million and are expected to be in the range of $7 to $12 million for the full year. Cash payments for severance expenses in France totaled $1 million during the first quarter of 2007 and are now expected to total approximately $7 to $10 million for the full year. Equity investments for Schweitzer-Mauduit's tobacco-related papers joint venture in China totaled $1.9 million during the first quarter of 2007, and are expected to be approximately $12 to $13 million for the full year.

The projected cash needs in 2007 for capital and software development spending, pension contributions, employee severance payments, and joint venture equity payments, total approximately $90 to $110 million. These cash requirements are expected to be funded through internally generated cash flow and increased borrowing in the range of $45 to $55 million from Schweitzer-Mauduit's five-year revolving bank credit facility. That, as of the end of March 2007 had $125 million available out of a total capacity of approximately $195 million. Cash provided by operations totaled $12.1 million for the first quarter of 2007 compared with $12.8 million during the first quarter of 2006. Little change occurred between the first quarters of 2007 and 2006 in cash provided by operations, due to the similar levels of net income and other cash-related activities between the two periods. Working capital increased by $1.7 million during the first quarter of 2007, in line with the increase of $2 million during the first quarter last year.

Today Schweitzer-Mauduit's board of directors approved a quarterly common stock dividend of $0.15 per share. This dividend will be payable on June 11th, 2007 to stockholders of record on May 14th, 2007. The company has paid quarterly dividends of $0.15 per share since 1996. We will now conclude our call with updates about our business strategies and outlook for the year.

Schweitzer-Mauduit's joint venture with the China National Tobacco Corporation to produce tobacco-related papers, both cigarette paper and porous plug wrap at a new state of the art paper mill in China continues to progress. Construction of the manufacturing building is proceeding and the project is advancing smoothly and on schedule with no operations currently expected to commence as planned in the first half of 2008.

Schweitzer-Mauduit provided Phillip Morris U.S.A. with a notice of phase out of the fine paper supply agreement between the two companies effective December 31, 2006. We have been in discussions with Phillip Morris U.S.A. throughout the 1st quarter of 2007 about a new supply agreement. As of yet, neither a firm schedule for concluding discussions nor an expected form of an agreement has been determined with Philip Morris U.S.A. and our supply of tobacco-related paper continues unchanged. The notification of phaseout does not affect the supply agreement between Philip Morris U.S.A. and Schweitzer-Mauduit concerning banded cigarette paper used to produce lower ignition propensity cigarettes. No immediate financial impact is expected as a result of this notice of termination.

Sales of cigarette papers for lower ignition propensity or LIP cigarettes continue to positively contribute to our operating results, especially as we realize manufacturing efficiencies.

As of January 2007, we were supplying the vast majority of the LIP-related cigarette paper requirements for the states of New York, Vermont, and California, plus Canada that require cigarettes to meet and LIP regulation and which total approximately 17% of the United States and Canadian generate consumption. A total of nine U.S. states have now passed LIP legislation, three in effect, and six to become effective over various dates up to April 1st, 2008 Including Utah, Kentucky and Oregon, which passed legislation this year. These nine states plus Canada total approximately 27% of U.S. plus Canadian consumption.

Additionally, another 18 states have introduced LIP legislation, including two states, New Jersey and Maryland, that have submitted laws to their respective governors for approval. Legislation introduced in 2007 has moved through the respective state legislative processes more quickly and required implementation of LIP regulations faster than experienced in the initial states to adopt such regulations. The combined Canadian and United States cigarette consumption represented by the nine states that have passed LIP legislation, plus the 18 states that have introduced LIP legislation, plus Canada, totals approximately 50%.

We continue to develop capacity for this expanding demand. The accelerating rate of LIP legislation impacting demand for banded cigarette paper combined with expected continuing improvements in manufacturing costs should provide additional improvement to the U.S. business unit results. We continue to experience weakness in tobacco-related paper sales, reduced demand for tobacco-related paper products in Western Europe and the United States have caused excess production capacity and increased machine down time.

Our actions to reduce inventories, especially in France in the fourth quarter of 2006 as well as the restructuring actions underway in both France and the United States have improved this situation during the first quarter of 2007. However, we continue to evaluate how to operate our worldwide production facilities more effectively with the reduced volumes of tobacco related papers. Analysis continues into possible further restructuring activities that could result in additional expenses. Though we are pleased with the solid start to the year in terms of financial results, we remain focused on completing the significant activity involved in the broad restructuring activities initiated in 2006.

As expected, we made progress during the first quarter in mitigating the continuing, albeit smaller impact of inflationary cost increases, and reduced production schedules that have decreased our earnings over the last several years. We will continue our efforts to do this through improved worldwide mill operations, the benefits from announced restructuring activities, and the continued growth in cigarette paper for lower ignition propensity cigarettes as well as reconstituted tobacco leaf products.

We reiterate that full-year 2007 earnings per share excluding restructuring expenses are anticipated to be at or above the $1.26 per share level achieved in 2005 as a result of the benefits of announced restructuring activities in our other business improvement actions. More than offsetting lower sales volume and continuing inflationary cost increases. That concludes our planned comments. Please open the phone lines for questions.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jonathan Lichter.

Hi guys.

Hello, Jonathan.

A question, you mentioned the strength of RTL in Eastern Europe and Asia. Was it not strong elsewhere?

It was essentially even elsewhere. There was some pluses and minuses but Western Europe wasn't a big negative. In fact, it was really better for sales in Western Europe than we saw in underlying cigarette fine paper sales in Western Europe. I caution you too, that the strength in sales we saw in recon or any lack of decline in Western Europe is coincident with the market, that can be order timing of when product sells or ships, but overall we saw strength in recon sales that obviously was important for the quarter.

Will the eastern European and Asian strength, do you see that continuing throughout the year or was that also just timing?

We would not see it continuing at the rate of the increase we saw in the first quarter but, yes, we would expect -- that is where we expect to see growth in recon, is in emerging markets in Eastern Europe and Asia, but not at the rate we saw in the first quarter.

So would there be a pause and then kind of a reacceleration later in the year?

It's not that smooth. It's hard to say what the next quarter would look like. It's very hard to say how exactly that would play out. What we did see is growth and we expect to continue to see growth in those regions and net we expect to see growth in recon sales as we have said before. But the rate of growth in recon sales most likely will be on a smoothed out basis in the mid single-digit increase level, and it was higher than that in the first quarter.

Okay. And then in terms of the U.S., the margins there were, I guess, the highest in a long time. Will that continue to improve as these additional states implement their laws?

That's a good question in terms of the absolute margins, yes, they were the highest they've been in essentially years. We are fairly confident of continuing to see better productivity or stable productivity in the U.S. The first quarter was very good in the U.S. To see that level of margin hold all year would be great, but not something that we would necessarily expect. Again, we can see some variation just in normal orders or production patterns in our mills. So from a precise first quarter measurement, I would not say that they would stay where they were and only increase. To the second part, will LIP demand growth further improve the U.S.? It will. The question is will it improve it from the precise number that we were at in the first quarter. That's less clear to say. I think the thing that we have said and will continue to point to is that we expect the U.S. business unit to improve year-over-year, which it clearly did, and that will hold all year, but whether it's at the rate we saw in the first quarter, I personally doubt it would be that strong all year.

Okay. And just a question on the tax rate. What do you expect for the full year?

I think we're probably now back to where taxable earnings are more normalized, so I would expect it to be kind of in the same range as we saw it in the first quarter, which is not that much different than what we saw the in the first quarter of last year. So 25%ish, around there.

Okay. Thanks a lot.

Your next question comes from Ann Gurkin.

Good afternoon.

Hello, Ann.

Returning to the LIP, the volume pickup, I'm sorry, the profit pickup in the quarter, was any of that one-time in nature?

No.

Did you have an order recap or anything?

No. Within the U.S. business unit, no, there weren't any one-time items in the first quarter.

Okay. And then with the RTL business, was any of that one-time?

No.

One-time orders in the quarter? No?

No. Again, twos a very good quarter sales-wise, but which, we couldn't say would repeat at that level ongoing. That would be pretty strong. But there wasn't any particular one-time tender-type orders that shipped during the first quarter.

Okay. And returning back to the U.S. for LIP, is there any -- are there any competitive products out there or anything you're hearing in terms of foreign companies trying to get into the market with an LIP product, anything like that?

No. No news that we're seeing either confirmed in terms of changes in the marketplace, nor anything really that we suspect is coming down the line. We continue to work with our customers to match, now increasing expectations for demand to our, especially, our Schweitzer technology, available capacity which is in good shape, but we're working with our customers to make sure it stays that way. So no indications that our leadership position is in jeopardy at this point, but of course we don't take that for granted, we work hard to protect that.

Okay. And then for prices, do you have a forecast for the full year?

We expect pulp prices to level out and then begin to decline. The announcement now for the second quarter in the U.S. for northern bleach soft wood to get to 790, the rate is definitely slowed and there's uncertainty whether the announced increase will hold. So it appears that it's reaching its peak. And that would be kind of our expectation right now. And then how long it plateaus before it would start back down, that's difficult to say but we do think, and we're not great at guessing this at all, but we do think that pulp is probably reaching a peak.

Okay. And France, do you -- is it possible to make or turn a profit in the French cigarette paper business in 2007?

That is our objective.

Okay. Given the weak first quarter?

Whether it's possible or not, the restructuring being implemented this year will be a challenge in a year where we're still implementing restructuring. We're-- we feel good about what we've done here in the first quarter but we still -- and we're on pace, but we still have a long ways to go in fully implementing our restructuring in the paper area in France.

Was the profit on the paper business in France in line with your expectations in the quarter?

We saw improvement without being specific on the amount of profit from the French paper segment, we saw improvement as we know note in our commentary along the lines of our business plan. So we are pleased that we're progressing as we had planned but we're certainly not done. That's the important point to emphasize.

Great. Thank you.

Okay.

[OPERATOR INSTRUCTIONS] Your next question is from Jonathan Lichter.

Have you seen any competitive moves by -- well, by your competitors in Europe to kind of get ahead of your restructuring there? In terms of lowering pricing or doing anything else like that?

No, we have not. And right now kind of during the course of a year, you wouldn't necessarily see a lot of competitive pricing activity because the multinationals, which of course dominate our markets, tend to have longer term agreements. Probably the next real test of our strategy and what's happening with pricing in the market will be this fall when one of the multinationals goes into another round of global negotiations. So, it would be pretty quiet until this fall in terms of any major pricing actions because there's not much volume that's really available.

Okay.

Thank you.

At this time, there are no further questions.

Very good. Thank you everybody. Good-bye.

This concludes today's conference call. You may now disconnect.