Mativ Holdings Inc (MATV) 2007 Q3 法說會逐字稿

Good morning. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the Schweitzer-Mauduit Third Quarter Results 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) Thank you. Mr. Thompson, you may begin your conference.

Thank you Julianne. Good morning. I'm Peter Thompson, Chief Financial Officer of Schweitzer-Mauduit International. With me are Wayne Grunewald, our Corporate Controller, and several executive officers of the company. Thank you for joining us for review of our third quarter 2007 financial results. I will be leading our conference call today.

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. 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 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 accounting principles generally accepted in the United States and are therefore non-GAAP financial measures. I will now review the highlights of the quarter and provide additional discussion of key factors in passing our results. I will not repeat the more detailed review of our third quarter financial results included in our earnings press release issued this morning.

The company realized a net loss during the third quarter as a result of restructuring expenses associated with actions recently announced in the United States, France, and Brazil. Excluding restructuring expenses, net income increased during the third quarter due to improved results for constituted tobacco leaf products and lower ignition propensity related cigarette papers as well as again realizing significant savings from cost reduction activities across our business.

Net sales totaled $184.2 million, 14% above the prior year quarter due to increased sales volumes, higher average selling prices, primarily caused by an improved mix of products sold and from favorable currency impacts. Restructuring expenses totaling $18.2 million were recognized during the third quarter. These restructuring expenses reflect our three-part restructuring plan in the United States, France and Brazil as announced on October 1st, 2007, as well as activities initiated in 2006 at Papeteries de Mauduit or PdM facility in France.

The company's gross profit margin which is not-- does not include restructuring expenses was 16.5% compared with 14.1% in the prior year quarter. The operating loss was $3 million compared with an operating loss of $2.8 million in the third quarter of 2006. Excluding restructuring expenses of $18.2 million and $12.4 million recognized in the third quarters of 2007 and 2006 respectively, operating profit would have been $15.2 million for the third quarter of 2007, an increase of $5.6 million or 58% over the prior year quarter. The diluted loss per share was $0.27 compared with a diluted loss per share of $0.11 in the third quarter of 2006. Restructuring expenses of $0.73 per share and $0.52 per share were incurred during the third quarters of 2007 and 2006 respectively. Excluding restructuring expenses from 2007 and 2006 results, diluted earnings per share would have been $0.46 per share for the quarter, a 12% increase over the third quarter of 2006.

The following comments provide additional explanation of key factors impacting our third quarter financial results. Sales volume increased 5% during the quarter over the prior year primarily due to gains in the French segment, totaling 11% that resulted from higher sales of reconstituted tobacco leaf products. Sales volumes in Brazil and the United States decreased by 7% and 1% respectively primarily reflecting reduced sales of commercial and industrial papers. Improved mill operations and savings from cost reduction activities across-- underway across the company significantly benefited third quarter results. During the third quarter, machine operating schedules increased within the French reconstituted tobacco leaf operation, offsetting the impact of reduced paper machine operating schedules and lower production volumes for tobacco-related and commercial and industrial papers, primarily in France and the United States. As a result, operating results were not materially impacted by changes in absorption of fixed costs during the third quarter.

The primary source of inflationary cost increases during the third quarter was from purchased wood pulp. The average list price of northern bleached softwood kraft pulp in the United States was $835 per metric ton during the third quarter of 2007, an increase of 11% compared with the third quarter of 2006 and 3% compared with the second quarter of 2007. We expect pulp prices could rise between 5% and 10% before reaching a peak in 2008.

Purchased energy costs were somewhat lower between the third quarters of 2007 and 2006. This is primarily due to lower electricity rates in France, resulting from the deregulation of electricity markets. Given the rising price of crude oil, we anticipate higher energy costs into 2008 as we renew energy supply agreements. Inflationary cost increases and the unfavorable earnings impact of machine downtime in the first three quarters of 2007 impacted our operating results by approximately $0.40 per share. During the first three quarters of 2006, these two items reduced our earnings by approximately $1.00 per share.

Non-manufacturing costs increased by $2.1 million or 16% 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 8.3% of net sales in the third quarter, an increase from 8.1% in the prior year period.

The Euro and Brazilian real strengthened during the quarter compared to the third quarter of last year by 8.7% and 14.4% respectively. These stronger currencies benefited the quarterly net sales comparison by $6.5 million. However, the stronger Brazilian real unfavorably impacted Brazilian business unit operating profit by $1.1 million during the quarter and by $2.2 million year to date. Total Brazilian unit operating profit excluding restructuring expenses has declined $500,000 year to date versus 2006 as we have to offset the majority of the unfavorable currency impact with increased sales volumes and cost reductions. However, a continued weak, U.S. dollar perpetuates unfavorable earnings implications upon our Brazilian operation and we continue to evaluate options to mitigate these impacts.

Net debt declined by $8 million during the third quarter but remained essentially unchanged at $84 million versus December 31st, 2006. Our total debt to capital ratio stood at 21% at the end of September 2007, down from the end of June 2007 and December 2006.

I will now cover cash flow items. Capital spending was $8.5 million during the third quarter of 2007. Capital spending for the restructuring-related investments at PdM totaled $2.4 million during the third quarter and is expected to total $25 million upon completion, which will now occur in early 2008. Spending for the rebuild of a base tipping paper machine in Brazil totaled $600,000 during the third quarter and is expected to total $11 million upon completion during the fourth quarter of 2007. In part due to the later completion of the PdM investment, capital spending for the full year of 2007 will now likely be in the range of $45 to $55 million. Our current projection for capital spending for 2008 is in the range of $25 to $35 million.

The projected full-year cash requirement in 2007 for capital projects, deferred software development spending, pension contributions, employee severance payments, and joint venture equity payments now total approximately $80 to $90 million. These cash requirements are expected to be funded primarily through internally-generated cash flow. Cash provided by operations totaled $52.6 million year to date and $30.7 million for the third quarter of 2007. During the third quarter of 2007, changes in working capital increased cash provided by operations by $21.3 million. Working capital decreases during the quarter in part reflected increased restructuring-related liabilities. The company has reduced working capital by approximately $40 million since the end of 2005.

Earlier today we announced a quarterly common stock dividend of $0.15 per share. The dividend will be payable on December 10th, 2007, to stockholders of record on November 12th, 2007.

I will now conclude my comments with updates about our business strategies and outlook for the balance of this year and 2008. The full scale of restructuring activities announced by the company are regrettable in terms of the impact on the affected employees in the local communities in which our mills have long operated. But these actions are necessary to restore a balance between effective and profitable utilization of our paper-making capacity and available demand. We are confident that these actions will not only improve earnings once fully implemented but will also improve the stability of our earnings by decreasing exposure to the weaker North American and Western European markets for tobacco-related papers. Upon full implementation, the restructuring activities announced in both 2006 and 2007 are expected to generate annual pretax benefits of approximately $21 to $23 million or $0.88 to $0.96 per share. Full realization of this range of earnings improvement from the restructuring actions is not certain and is dependent upon other factors that impact on our business, including continuing weakness in cigarette consumption in developed parts of the world.

Implementation of these actions is proceeding. The PdM restructuring announced in 2006 is nearing completion with approximately 70% of the 209-person employment reduction now complete. The majority of the additional employment reductions will occur in the fourth quarter of 2007 and end upon completion of the capital investment in early 2008. A 60-person reduction was achieved in Brazil during the third quarter. In the United States and France, actions are underway internally and with customers to prepare for the transfer of base tipping paper production upon completion of the base tipping paper machinery build in Brazil scheduled for completion in the fourth quarter of 2007 and subsequent customer product qualifications during 2008. Further, we are in negotiations with labor unions in both the United States and France to finalize severance agreements.

Under the recently announced three-part restructuring plan, we project pretax restructuring expenses of $27 to $30 million, comprised of $15 to $17 million in fixed asset impairment charges, accelerated depreciation and other non-cash costs and $12 to $13 million in severance and other cash costs. Combined with restructuring activities announced in 2006, total restructuring expenses from 2006 through 2008 are now expected to be in the range of $56 to $61 million comprised of $34 to $36 million in severance and other cash costs and $22 to $25 million in fixed asset impairment charges, accelerated depreciation, and other non-cash costs. We expect further increases in sales volume in 2007 and through 2008 in both reconstituted tobacco leaf products and lower ignition propensity related cigarette papers that will benefit our operating results related to these products.

Regarding lower ignition propensity, a total of 22 states, representing approximately 40% of the U.S. cigarette consumption, have enacted regulations that will progressively become effective through January 2009. During the third quarter, we initiated operations at our new production facility in South Carolina, dedicated to expanding our processing capacity and capabilities to meet the growing demand for this cigarette paper.

Given the strength of third quarter 2007 results, we now project full-year earnings excluding restructuring expenses to exceed the high end of our previous earnings guidance of $1.15 per share. The fourth quarter of 2007 is expected to be weaker than the third quarter of the year given planned downtime for the paper machine rebuild in Brazil and normal operational downtime in our mills around the year-end holidays.

Diluted earnings per share in 2008 excluding restructuring expenses are expected to exceed $1.50 per share for the full year. Growth in earnings in 2008 is expected to come from increased sales volumes for reconstituted tobacco leaf products and cigarette paper for lower ignition propensity cigarettes as well as from benefits of the announced restructuring activities.

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

Thank you. (OPERATOR INSTRUCTIONS) Your first question is from the line of Ann Gurkin with Davenport.

Good morning.

Hello Ann.

Wanted to start with the LIP in the U.S. Reynolds talked about voluntarily converting to the use of fire-safe paper about the end of 2009. So are you including that in your '08 outlook?

No, we are only including the currently passed legislation in the various states.

Okay, but that could be a pickup in the back half of 2008?

Yes.

Correct. Okay.

Yes.

Brazil, you talked about moving tipping paper volume to Brazil and reworking a line. Have you built up tipping paper inventory to meet customer demand while the product's getting qualified?

We started that process yes in the U.S. We will be building inventory. During the third quarter, we started the process. Fourth quarter and then it'll probably top out maybe a little bit more growth in the first quarter as we prepare to shut down the leaf mill operation and begin to transfer production.

So you've built inventory both in the U.S. and Brazil for tipping paper?

No, in Brazil it's really building in the U.S. And then that'll tide us over as we begin to phase in supply from Brazil next year.

Okay. You are currently negotiating for business from BAT. Can we get an update on where that stands?

We're still in the process of that negotiation. It's reaching conclusion. It should be concluded I would guess in the next month or so. But at this point, it's still not conclusive across the board. So it would be premature to talk about results.

Do you expect a final decision pre-Thanksgiving still?

I would anticipate yes that we should be done before then.

Okay. Any update on China RTL?

No, we continue to work on that project in terms of negotiations and government approval. The primary task right now is with government approval of a joint venture project. We still expect it to proceed but it's very difficult to predict the approval process. One of the complexity factors that we faced in China with that is just by coincidence, the approval process in China for major capital projects, which we would qualify as changed. So we kind of had to start back over again in the queue to get the project approved. But we do expect approval. Upon project approval, we would definitively negotiate our joint venture agreement with our partners and announce. But at this point we're still working on it.

Okay and I've seen increased discussions about the potential use of LIP paper in the EU. Can you comment on your level of confidence and the strength of your LIP patents in the EU environment, not the U.S. but EU?

Yes we feel we have the same level, an adequate protection with patents in the EU. Our patents are international. The bigger issue would be when demand in the EU will firm up, when the legislation process will be not speculative but concrete and then how we would prepare to serve that market. But in terms of both our market position, our product offerings, etc. we feel as confident about the EU market as we do about the North American market for our product.

Great, thank you.

Thank you Ann.

Your next question is from the line of Jonathan Lichter with Sidoti & Company.

Morning.

Hello Jonathan.

In terms of RTL, what gives you the confidence that demand will continue into the next year? Is backlog up there?

Yes what we're seeing in terms of confidence in LTR volumes, recon volumes is growth in emerging markets. That gives us pretty good confidence for further growth. And stability in our primary markets or Western European markets, where we've long sold. As you recall, the weakness that we saw from a sales side in recon was more in the Western European side of the business. And we're not seeing as much weakness there. In fact, we're really seeing year-over-year, some small levels of increase. But we're more confident with our growth that we're seeing in emerging markets especially in Asia.

Has anything changed in the market that has made that more stable in Western Europe?

No I think-- well there's two things, one for sure that we can point to. One is the Western European market declines have not been as severe. There have been declines in consumption of cigarettes but not as severe as there was in 2005 and early 2006 following a period of fairly significant tax increases in a number of the major countries. So we're not seeing that change in demand causing volatility. The other thing that we're not seeing develop as quickly as we did initially after those tax increases was the development of value for money brands. The premium brands are holding their own throughout Western Europe, which is more favorable to our recon business.

And then I saw that there was a-- I guess machine rebuild was put on hold for a period of time. Was that due to increased demand and what caused that?

Yes as we noted the final equipment rebuilds at the PdM facility associated with the restructuring are now pushed into early '08. It is because of stronger sales, not in total for our French businesses as we signal the overall tobacco-related papers business is still soft but that particular machine, which is our number 10 machine at PdM is specialized on certain grades and that would be for Asian markets. And it just turned out that the order log was strong enough that we couldn't take the machine down in December as we planned. And so we've moved the machine down into January. So it's a slight shift but the-- there was a bit of an equipment delay issue. But the primary reason was we couldn't fully build the inventories that we needed in time to take the machine down.

Okay. Are you seeing any other competition, particularly in Europe, for LIP?

Well not in Europe. On the European side, it would only be in developments, which wouldn't be as visible to us. We're certainly working closely with our international customers on LIP requirements and specifically for Europe. We're not aware specifically in Europe or in general of any new developments with LIP by our customers or by our competitors.

Do other-- I thought I'd seen something that Miquel Costas, I think it was, had developed an LIP paper.

Yes Miquel y Costas, which is the Spanish competitor that we face, has noted or said to have had an LIP product available even for the North American market for a number of years now. But we have not seen that product commercially at any of our accounts in North America and we're not aware of that product. Again there's not commercial demand in Europe. But we're not aware of that product being recently improved or developed further.

Okay. And then just a question on taxes. What do you expect the tax rate to be in '08?

I would say-- well we're going to still have restructuring expenses. So as long as we have significant restructuring expenses that tends to cause, like we saw in the third quarter where we actually booked a tax benefit. But exempting that, we should continue to be around 25 to 27% effective tax rate as a company. But the caveat to that is when we have large periods of restructuring expenses that take us to a near or at a taxable loss position, the effective rate kind of goes upside down and we turn into a tax benefit position. So on an ongoing earnings basis, 25 to 27%.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is from the line of Thomas Russo with Gardner, Russo, Gardner.

Hi Pete.

Hello Tom.

Hi, good morning. I just wanted you to bring us up to date on your capital structure. And in particular whether and if at some point as operating cash continues to mount you have ability to direct share buyback activities back to Schweitzer?

That is an accurate observation that we continue to be in a better debt position than we thought we would. We have not raised debt this year as expected because we've had strong cash flow. So going forward from a cash flow management standpoint, we recognize that continually paying down debt at some point doesn't make sense. And so we would look at share repurchases depending upon the share price in the market for our stock and then of course any requirements that we project having for strategic investment.

Yes.

And we anticipate that the additional activity will occur in China in terms of expansion that would require cash. And then of course if anything would come up from an acquisition standpoint that would require cash. But absent the large cash requirement, then share repurchase would probably be either that or leveraging up even to do share repurchases would be a source or use of cash.

Thank you. Congratulations.

Thank you.

There are no further questions at this time. I apologize, you do have a follow-up question from the line of Jonathan Lichter with Sidoti & Company.

Quick question on-- is there any indication that the rest of LTR Industries is up for sale or will it be?

Well there's no indication of that. The obvious point to be raised about LTR is our partner at LTR is Altadis, a cigarette company, which is currently being acquired by Imperial Tobacco Company out of the UK. And it's been announced as a part of that process, the intent to sell non-core assets. So whether or not a non-core asset is our-- their share in our recon business, that would be the only connection. But there's nothing definitive that we can say about that. Certainly we would be of interest. But it depends on a lot of factors. And the key factor would be that it become available.

Thanks again.

There are no further questions.

Alright. Thank you all for taking the time to join us today. Goodbye.

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