Mativ Holdings Inc (MATV) 2007 Q2 法說會逐字稿

Good morning. My name is Jessica and I will be your conference operator today. At this time I would like to welcome everyone to the second quarter Schweitzer Mauduit earnings conference call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS) Thank you. Mr. Thompson, you may begin your conference.

Good morning. I'm 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 second quarter 2007 financial results. I will be leading our conference call today. Various comments or remarks that we make during this conference call include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 report, including the company's 2006 annual report. Certain financial measures that will be discussed during this call exclude restructuring expenses. Financial measures which exclude this item have not been determined in accordance with the accounting principles generally accepted in the United States and therefore non-GAAP financial measures.

I will now review the highlights of the quarter and provide additional discussion of key factors impacting our results. I will not repeat the more detailed review of our second quarter financial results included in our earnings press release issued this morning. Net income improved by $300,000 over the prior year quarter, due to increased earnings in reconstituted tobacco products and cigarette paper used in lower ignition propensity cigarettes. Despite these achievements, we did not sustain the rate of year over year earnings improvement seen in the first quarter of 2007, because our traditional tobacco related papers business experienced greater earnings weakness during the second quarter. This was caused by continuing cost inflation, the unfavorable impact on earnings from reduced volumes, and further strengthening of the Brazilian real.

We again realized significant savings during the second quarter from cost reduction activities across our business but not at the same level as during the first quarter of the year. Net sales totaled $171.8 million, 6% above the prior year quarter, due to higher average selling prices primarily caused by an improved mix of products sold and from favorable currency impacts partially offset by lower sales volumes.

Restructuring expenses in France totaling $3 million were recognized during the second quarter. The restructuring expenses also included $400,000 in the second quarter as a result of previously announced actions at the Lee, Massachusetts facility. We have now realized $27.2 million in restructuring expenses in full year 2006 and through June 2007, for approximately 80% of the total range of $31 to $33 million projected for the announced programs in France and the United States.

Operating profits were $6 million compared with $4.2 million in the second quarter of 2006. Excluding restructuring expenses for both 2007 and 2006 results, operating profits would have been $9.4 million for the second quarter of 2007, an improvement of $1.8 million or 24% from the prior year quarter. The company's gross profit margin, which does not include restructuring expenses, was 15.1% compared with 13.7% in the prior year quarter. Diluted earnings per share were $0.06, compared with $0.04 in the second quarter of 2006. Restructuring expenses of $3.4 million or $0.14 per share were incurred during the second quarters of both 2007 and 2006. Excluding restructuring expenses for 2007, and 2006 results, diluted earnings per share would have been $0.20 per share for this quarter, an 11% increase over the second quarter of 2006.

The following comments provide additional explanation of key factors impacting our second quarter financial results. The primary source of inflationary cost increases during the second quarter was from purchased wood pulp. The average list price of northern bleached softwood kraft pulp in the United States was $810 per metric ton during the second quarter of 2007,an increase of 15% compared with the second quarter of 2006, and 3% compared with the first quarter of 2007. We anticipate pulp prices are nearing their peak, but may realize a further increase less than 5% during the balance of this year.

Purchased energy costs were essentially unchanged between the second quarter and year to date periods of 2007 and 2006. This is primarily due to lower electricity rates in France offsetting higher rates in the United States. With rising fuel oil and natural gas prices, combined with deregulation of electricity markets in France, we anticipate somewhat higher energy inflation in the second half of 2007, and into 2008 as we renew energy supply agreements, but not the level of increase realized in 2005 and 2006.

Sales volumes decreased 3% during the quarter, impacting both net sales and operating profits, the latter including both the direct impact of changes in sales volume as well as the unfavorable impact on fixed cost absorption for reduced paper machine production in France and the United States. The sales volume decline varied by business units, but globally totaled 5% for our tobacco related sales. This was caused by decreased demand in Western Europe and North America, which we estimate at 4% in the first half of 2007, and by lower shipments to the multinational cigarette companies. The decline in shipments primarily reflected the impact of cigarette production transfers for Phillip Morris U.S.A., which is sole-sourced by our U.S. business unit, to Phillip Morris International locations sourced by multiple suppliers.

Sales volume of reconstituted tobacco leaf decreased during the second quarter in comparison to a strong second quarter 2006, which included shipment of a tender order. Reconstituted tobacco leaf sales volume to ongoing accounts continue to increase and we expect full year sales growth in the high single digits. This has led to improved utilization of machine capacity and associated favorable fixed cost absorption impact for these products. Inflationary cost increases and the unfavorable earnings impact of machine downtime in 2006 totaled approximately $1.50 per share. During the first half of 2007, these 2 items reduced earnings by approximately $0.31 per share, 60% below the rate of last year. Non manufacturing costs increased by $2 million or 14% versus the prior year quarter, 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. Non-manufacturing expenses were 9.7% of net sales in the second quarter, an increase from 9% in the prior year period.

The euro and Brazilian real strengthened during the quarter compared to last year by 6.3% and 11.2%, respectively. These stronger currencies benefited the quarterly net sales comparison by $6.8 million. However, the stronger real unfavorably impacted Brazilian business unit operating profit by $800,000 during the quarter and by $1.1 million year to date. Total Brazilian unit operating profit has declined only $100,000 year to date versus 2006, as we have offset the majority of the unfavorable currency impact with increased sales and production volume and cost reduction. However, the Brazilian operation has an imbalance of approximately one third of its revenues and two thirds of its costs tied to the real. Consequently, we are examining further ways to mitigate currency impact.

Net debt increased $8.4 million or 10%, since December 31st 2006, but declined by $12 million compared to the end of the second quarter 2006. Our total debt to capital ratio stood at 23% at the end of June 2007, unchanged from the end of March 2007 and December 2006.

I will now cover cash flow items and the payment of dividends. Capital spending was $9.3 million during the second quarter of 2007, and $18.3 million year to date, including $2.5 million for the restructuring related investments at PDM, and $3.4 million for the rebuild of a paper machine in Brazil. Spending also included $2.9 million for the purchase of a facility in South Carolina for the processing of cigarette paper for lower ignition propensity cigarettes. Full year capital spending for 2007 is now expected to be at the low end of the previously stated range of $55 to $65 million, including spending toward a $25 million capital investment at PDM and an $11 million paper machine upgrade in Brazil.

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, of which $37.3 million has been incurred through June 2007. These cash requirements are now expected to be funded primarily through internally generated cash, combined with increased borrowings in the range of S15 to $25 million from Schweitzer Mauduit's bank credit facilities. Cash generated by operations totaled $11.8 million for the second quarter of 2007 compared with $9.4 million during the second quarter of 2006. Changes in working capital increased cash provided by operations by $3.2 million during the second quarter of 2007.

Earlier today we announced a quarterly common stock dividend of $0.15 per share. The dividend will be payable on September 10, 2007, to stockholders of record on August 13, 2007.

I will now conclude my comments with updates about our business strategy and outlook for the year. A total of 21 states representing approximately 40% of U.S. cigarette consumption, including 12 additional states during the second quarter, have now enacted lower ignition propensity regulations that will progressively become effective through January 2009. As noted earlier, during the second quarter we purchased a production facility in South Carolina dedicated to expanding our processing capacity and capability to meet the growing demand for this cigarette paper. With further increases in sales volume of this cigarette paper, combined with improvements in manufacturing costs, we expect continued gains in financial results from these products.

Schweitzer-Mauduit's joint venture with China's National Tobacco Corporation to produce tobacco related papers at a new state of the art paper mill in China continues to progress. Construction of the manufacturing building is proceeding, the project is advancing smoothly and on schedule with mill operations currently expected to commence as planned in the first half of 2008. Additionally we continue to make progress towards an agreement with CNPC on a reconstituted tobacco leaf joint venture in China.

We continued implementation of our strategy to become a low cost the highest quality cigarette and long fiber paper manufacturer in Western Europe. At our PDM paper mill in France, employee reductions through June 2007 totaled 94, or 45% of the 209 total reductions planned. The remaining reductions are expected to occur later this year. The $25 million rebuild of the cigarette paper machine and related equipment is progressing on schedule. The PDM restructuring plan resulted in the shutdown of one cigarette paper machine earlier in 2007 and a second machine is expected to cease operation later this year.

Before restructuring activities have been fully implemented, it is becoming apparent that these actions may not be enough to restore a balance between effective and profitable utilization of our papermaking capacity and available demand, and that further restructuring may be required. The recent announcement from Philip Morris U.S.A., the planned shutdown of its North Carolina cigarette factory, coupled with historically high declines in U.S. cigarette consumption during the first half of this year, signaled continuing weakness in North American demand for our products. Likewise, the competitive environment throughout Europe presents further challenges for Schweitzer-Mauduit to sustain sales volumes at present selling price levels. This may risk full realization of earnings improvement from our French restructuring activities. The continuing strengthening of the Brazilian real to both the U.S. dollar and euro has unfavorably impacted not only earnings for our Brazilian unit, but also its cost competitiveness on a global basis. We now project that full year 2007 earnings per share, excluding restructuring expenses will be in the range of $1 to $1.15, which would be an improvement over the 2006 level of $0.83 per share, but below the 2005 level of $1.26 per share. Earnings per share in 2008, excluding restructuring expenses, are expected to increase above the 2007 level as a result of growth in reconstituted tobacco products and cigarette paper for lower ignition propensity cigarettes, as well as possible from the benefits of current and possible additional restructuring activity that may be announced this year.

That concludes our planned comments. Jessica, please open the phone lines for questions.

(OPERATOR INSTRUCTIONS) Your first question from comes from the line of Jonathan Litcher.

Hi guys.

Hello, Jonathan.

Do you see any indication that they're -- the volumes are rebounding this quarter?

Well, the analyst reports for the multinationals, especially focusing on the majors in the U.S. do predict that the second half volumes -- and this is information from the cigarette companies, too -- will be better than the first half volumes. You know, in terms of our current situation, we know it's not evident that we are going to see a significant change in the volume situation. I would guess that likely what we will see is that most -- not as much of a continuing decline more of a stabilization in the current volumes, but I doubt that will significantly make up the volume decline that we saw in the first half of the year in the second half of the year. So I think we're right now pretty firm on page to have a full year substantial decline in sales volume.

And how are the negotiations with Philip Morris going over a new agreement?

We continue to have discussions with Phillip Morris. Obviously their announcement here recently about the shutdown of the (Caberas) facility signals that the ongoing volume requirements for PM U.S.A. are going to be much lower than previously expected, once that full volume transfer occurs. That certainly will have a bearing on what type of ongoing relationship we have. The real issue will become at what point is it feasible to source all of Philip Morris USA's requirements from our domestic operations? Or does it get to the point where the total volume is too small to be able to sustain domestic operations?

So that would entail shutting the regular production of cigarette paper?

Well, not speaking specifically to any one product area, but simply as the total production in North America of cigarettes continues to decline because of lower consumption and now a very significant transfer of export cigarette production, at some point we could get to the point where a sole-source agreement does not make sense and that the ongoing sourcing may be better to do from our foreign operations than only domestically. But at this point we have not reached any conclusions and we continue to talk through these issues with Philip Morris but it's in a changing environment.

Given the profitability differences, would it make sense to just end production of cigarette paper at some point in Europe if it just can't become profitable given the competitive landscape there?

Not realistically, no. Obviously the issue is trying to find a point at which there is a balance that allows for a reasonable profit to be earned, but ceasing operations of cigarette paper in Europe would not happen before --- and I'm not saying this will happen -- but before that would ever happen in North America, for example - so I think cigarette paper will be a base of operations for us for many years to come in Europe.

Okay. So the additional restructuring would probably include additional machine shutdowns? Would that probably be -- ?

We're not yet in a position to say, but obviously restructuring would entail both reductions in machine operations in order to have a writing of demand and of our supply, as well as labor levels, employment levels.

Okay. Thank you.

We do not -- we do not envision that further restructuring would occur at this point at our PDM facility. That's obviously already under way.

Okay. And what would be the timing on the state, do you think? Would it be '08, or sometime during '07 still?

We're not -- because our plans are not yet firm I can't say whether it would be '07 or '08, but most likely it would occur before the end of '08. You know, as seen in our second quarter results and commentary, we're - depending on what happens with volume going forward, but it's not going to, I don't think, significantly change -- we need to take action based on our current imbalance so the sooner we take action, the better. So I would think it's safe to say to say before the end of '08, if not sooner, depending on how quickly we can get our plans firmed up.

Thank you.

Your next question comes from the line of Ann Gurkin.

Good morning.

Hi, Ann.

Continuing on with the restructuring conversation, have you initiated additional conversations with the French authorities to take further action in your facilities over there?

Not at this time.

Okay. And in the U.S., how about an announcement regarding restructuring here in the U.S.?

We have not made any announcement.

Will we hear something by year end?

We signaled that we could be announcing, yes, by the end of the year. It depends on how quickly we can decide what it is we are going to and then do the appropriate coverages in wherever the locales are the restructuring would occur. I would hope that we can announce something before the end of the year. Not effective by the end of the year, but announced by the end of the year.

Okay. Great. And then with respect to Phillip Morris negotiations, what is the likelihood that you lose all that business and Philip Morris opts for another supplier? Can you update us on that, here in the U.S.?

Yeah, again, the negotiations, or the discussions, is a better way to characterize it, are ongoing. The prospects, though, of not sourcing Phillip Morris from the U.S. or at all from Schweitzer Mauduit I would say are very, very low. I would say the prospects of continuing a sole-source agreement are less certain, but the prospect of no sourcing is almost unforeseeable.

Okay, switching to LIP. What is the likelihood that the domestic industry in its entirety will convert, or make the announcement to convert to the use of LIP? Is it across this portfolio? Do you think we'll see one or two manufacturers make an announcement by year end or maybe the whole industry? Can you give us an update there?

Well, certainly it's possible that one of the majors or more would go voluntarily, especially as the patchwork of states and the quantity of states grows. We're not aware of any specific decisions to do that by any of the U.S. cigarette companies. Our own belief is that it will occur on a voluntary basis nationally before it would occur on a regulated basis nationally. When that might occur, I would say that it's probably in the 2008 - 2009 timeframe, again because of the number of states in the patchwork of states.

The announcement or the conversion --voluntary conversion by the manufacturers to use LIP across their portfolio?

I'm sorry, say that again?

The announcement of a conversion or the actual event of converting to use LIP --?

I would guess that the announcement, and then the actual conversion would follow pretty quickly. And we have and are working with our customers to plan for a scale up of capacity to meet needs up to a national basis. Of course we already have that in place with Phillip Morris in our online process, but with our Schweitzer process, and obviously the South Carolina facility acquisition demonstrates that. We are taking the enabling steps to be prepared to meet national requirements or growing requirements. In terms of --

At what point will you meet national requirements? Will you have the capacity in place to meet a national rollout for the entire industry?

For the current customers of LIP, we would be in a position to meet national requirements before the end of 2008.

And will that require additional capa -- capital spending on your part?

Not beyond the range of capital spending guidance that we've given.

Okay. And then could give us an update on -- I hear there are increased discussions of LIP in the EU, could you give us an update there?

Yes. There have been two primary efforts in the EU. The first is a petitioning of the EU Product Safety group or a part of the EU organization to put forth a standard based on the same standards used in the U.S. which is an (ASTN) standard for LIP and that would be a first step toward possible regulation, but there's no firm date on regulation. And then, Finland as a country has introduced legislation separate from the EU petition to enact LIP regulations that would be effective within 3 years from the date of passage, which of course is not firm. So there is stepped up activity in Europe. The European product safety rulemaking process moves very slowly. We would not anticipate even on an aggressive schedule that LIP legislations would be affecting Europe within probably 3 years at the earliest.

And what is your competition like for LIP products both within the U.S. and overseas?

Currently we continue to enjoy a leadership position with very little competition that's yet shown up. Obviously that's something we don't take for granted, we're working hard to hold our position in terms of improving our product, lowering our costs, developing generation products and firming up intellectual property protections. But as the demand for this product grows, obviously the incentive for both cigarette companies and our competition to develop alternatives increases. So we believe it's just a matter of time before effective competition arises but at the moment we still enjoy a very clear leadership position.

Both in the domestic market and overseas?

Yes. Overseas there really isn't a market, so it's really what we see present here North America.

Okay. Switching to China, is it still the plan to bring on one paper line in the first quarter of '08, and the second in the mid point of 2008?

Yes. The first line will be in the first quarter or early second quarter, and then the second line will be after that, but operational still in the first half of the year.

Okay. And then, sorry, in France, the operating profit looked like it weakened from -- loss on the cigarette paper looks like it weakened from the first quarter. Can you explain that? And is there any way to make that profitable by the back half of 2007, the French cigarette paper business?

Yes, you are correct. The improvement in the French unit was really through the reconstituted tobacco side of the business, the paper side of the business did not improve, it weakened. And it's really due to the fundamentals we highlighted of the impact of lower sales volumes, continuing --although inflation wasn't nearly the driver that it's been -- and then not having the same rate of cost reduction improvement, including restructuring that we saw in the first quarter. All told then, those factors combined to -- especially the volume side of it -- lower the earnings for the tobacco related paper business in France. Until we can either see a change in the volume situation or fully affect the restructuring at PDM, or identify and then implement other restructuring, it's going to continue to be a weak earnings outlook for tobacco papers in Europe.

Did you lose a contract in the French business? Is that why the volumes are down?

No, we did not. It's purely due to lower demand from our customers, is really the driver, not any change due to any new negotiations or implementation of a new buying agreement.

And then one more thing, the shift in Phillip Morris volume overseas. Do you know if you're going to retain any of that volume out of your French operations at this point?

We will obtain some of that volume out of our French operations but we know for sure that we will not --- you know, we sole-sourced that line when it's made in the States -- when it moves overseas, we will not sole-source it. So Schweitzer Mauduit will net lose volume as we see that volume transfer. What we do not know is exactly how much of the demand for tobacco related papers we will receive when those cigarettes begin production in Europe.

Great. Thanks very much.

Okay.

(OPERATOR INSTRUCTIONS) There are no audio questions at this time.

All right, thank you. Thank you all for joining us today.

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