Mativ Holdings Inc (MATV) 2007 Q4 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time I would like to welcome everyone to the Schweitzer-Mauduit fourth-quarter 2007 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you, Mr. Thompson. You may begin your conference.

Thank you, Nicole. Good morning. I am 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 a review of our full year and fourth-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 comments 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 full year and fourth quarter of 2007 and provide additional discussion of key factors impacting our results. I will not repeat the more detailed review of our fourth-quarter financial results included in our earnings press release issued this morning.

Earnings per share excluding restructuring expenses totaled $1.20 for the full year and $0.16 for the fourth quarter of 2007. These amounts compared to $0.83 for the full year of 2006 and a loss of $0.08 for the fourth quarter of 2006. Full-year 2007 earnings per share increased 45%. The primary causes of both full year and fourth quarter earnings growth included improved results for reconstituted tobacco products and lower ignition propensity cigarette papers as well as significant savings from cost reduction activities across our business.

Our 2007 earnings per share of $1.20 excluding restructuring expenses achieved our projection to exceed the high end our previous earnings guidance of $1.15 per share. On December 21, 2007 Schweitzer-Mauduit entered into an agreement to purchase the 28% of LTR Industries, SA or LTR owned by a subsidiary of Altadis, SA.

We are pleased to announce that this acquisition was completed in January. We expect this acquisition to be accretive to earnings in the range of $0.28 to $0.34 per share subject in part to final purchase accounting. The minority interest in LTR earnings doubled to $8 million in 2007 from $4.1 million in 2006.

Net sales increased versus 2006 by 9% and 13% for the full year and fourth quarter respectively primarily due to favorable foreign currency impacts and an improved product mix. Unit volume increased about 0.5% for the full year while being essentially unchanged during the fourth quarter.

Sales volumes increased primarily due to gains in the French segment including 11% higher full-year sales of reconstituted tobacco leaf products. Sales volumes in Brazil increased 2% during 2007 while US volumes declined by 10% primarily reflecting reduced sales of commercial and industrial papers.

Restructuring expenses totaled $24 million in 2007. Restructuring expenses for 2006 and 2007 totaled $45.1 million or 85% of the 51 to $54 million we project for all announced restructuring actions underway in France, the United States and Brazil. The projected amount of restructuring expenses has declined by 5 to $7 million or about 10% from original estimates due to lower than expected employee severance expenses in France.

Through 2007, we have paid $11 million in cash severance payments or one-third of the total expected. The balance will be paid through mid 2009.

The Company's fourth quarter gross profit margin which does not include restructuring expenses was 12.4% compared with 8.8% in the prior year quarter and for the full year was 15.1% compared with 12.8% in 2006. Operating profit excluding restructuring expenses totaled $41.9 million for the full year and $5.5 million for the fourth quarter of 2007. These amounts increased 59% for the full year and $5.8 million for the fourth quarter compared with the prior year.

Improved mill operations and savings from cost reduction activities underway across the Company again benefited results for both the full year and fourth quarter of 2007. 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.

Higher per ton cost and for purchased woodpulp caused 60% of the $13 million or $0.54 per share of inflationary cost increases realized during 2007. The average list price of for northern bleached softwood kraft pulp in the United States which reached $855 per metric ton during the fourth quarter of 2007 increased 14% in 2007 over 2006. Average pricing rose 2% during the fourth quarter. We expect pulp prices could rise an additional 5% in 2008 before reaching a peak.

The other 40% of inflationary cost increases in 2007 included higher other material prices and increased labor rates. Energy costs were essentially unchanged year-over-year. However energy cost increased sharply along with other material pricing during the fourth quarter of 2007.

Energy costs alone rose an annualized $0.27 per share during the fourth quarter and fully offset year-to-date decreases realized through the first nine months of 2007. The fourth quarter increases reflect higher natural gas and fuel oil costs in the United States and increased electricity rates in France. The recent pace of energy cost increases is within the projections used to determine our 2008 earnings outlook but still presents a risk to 2008 results.

Nonmanufacturing expenses were 9.3% of net sales for the full year of 2007 an increase from 8.8% in 2006. Nonmanufacturing expenses are expected to remain at the 2007 level in 2008.

Although a weaker US dollar benefited our revenue comparison, the stronger Brazilian real unfavorably impacted Brazilian business unit operating profit by $2.3 million during the quarter and by $4.5 million for the full year. Total Brazilian unit operating profit excluding restructuring expenses declined $2.2 million in 2007 versus 2006 reflecting that we successfully offset one-half the unfavorable currency impact with increased sales volume and cost reductions. To mitigate the negative earnings impact of currency going forward in December we began entering into hedging agreements designed to lock in an exchange rate within the range underlying our earnings projections for the Brazilian segment for the first half of 2008.

Net debt increased $13.3 million or 16% from year-end 2006 to 2007. Essentially all of this increase occurred during the fourth quarter. Our total debt to capital ratio stood at 22% at the end of 2007 versus 23% at the end of 2006. Debt levels will increase due to the EUR$35 million or $50 million acquisition of the minority share of LTR which closed in January 2008 and is projected to increase our total debt to capital ratio to slightly above 30% but within our target range of 25 to 35%.

Capital spending totaled $20.9 million during the fourth quarter of 2007 or 44% of the full year amount. Capital spending for restructuring related investments in France and Brazil accounted for 75% of the quarterly total. Full year 2007 capital spending totaled $47.7 million within the range of 45 to $50 million projected. Our current projection for capital spending for 2008 is in the range of 30 to $40 million.

Cash provided by operations totaled $71.4 million in 2007 an increase of $19.6 million or 38% from 2006. Working capital decreases represented 36% of the total cash generated during 2007 compared with 39% in 2006. Working capital reductions achieved in 2007 in part reflected increased restructuring related liabilities. The Company has reduced working capital by approximately $46 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 March 17, 2008 to stockholders of record on February 18, 2008. I will now conclude my comments with updates about our business strategies and outlook for 2008.

Restructuring activities initiated during the last years are now under well underway and allowing us to make progress in restoring a balance between effective and profitable utilization of our papermaking capacity and available demand. (inaudible) implementation the announced restructuring activities 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 will be completed in the first quarter of 2008 upon conclusion of the capital investments. Progress is being made in both France and the United States in transferring base tipping paper production from those locations to Brazil following the fourth quarter 2007 completion of the base tipping paper machine rebuild in Brazil. In January, we reached agreement with employees on severance terms at our French paper mill located in Malaucene.

We expect further increases in 2008 sales volumes of both reconstituted tobacco leaf products and lower ignition propensity cigarette paper that will benefit our operating results related to these products. We project that reconstituted tobacco leaf sales volume growth will likely again exceed 10% in 2008 and beginning in February 2008 we will retain 100% of LTR earnings.

Regarding lower ignition propensity, three states' regulations became effective on January 1, 2008 thus raising 23% the proportion of North American cigarette consumption covered by this requirement. By August 2008 LIP cigarette laws will cover an estimated 44% of North American consumption. Five states have introduced or reintroduced LIP proposals so far in 2008 supporting the likelihood that LIP cigarettes will be sold nationwide by late 2009 or early 2010. Finally, international LIP efforts are accelerating especially in the European Union which has taken the first step in the rulemaking process by mandating that an LIP test standard be developed by mid 2008 with implementation of LIP regulations likely to follow by 2010.

Also, we recently negotiated terms for a multiyear supply of tobacco related papers with British-American Tobacco Company, one of our largest global cigarette customers. The results were largely in line with the expectations for these negotiations underlying development of our 2008 earnings projections.

We reiterate that 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 the benefits of the announced restructuring activities.

Additionally full ownership of LTR increases the likelihood of achieving these earnings projections. However, we anticipate that the first quarter will be the lowest earnings period of 2008 due to planned downtime to complete the capital investments at the PDM mill along with expected unfavorable onetime purchase accounting impacts associated with the LTR share acquisition. That concludes our planned comments. Nicole, please open the phone lines for questions.

(OPERATOR INSTRUCTIONS) Jonathan Lichter,Sidoti & Company.

So the guidance does include LTR -- it did not include LTR in Q3 or it did it?

No, the exceeding $1.50 per share did not include LTR after the third quarter. Now with LTR's acquisition certain we haven't updated the exceeding $1.50 but obviously we have acknowledged that it certainly makes it much more probable we will exceed $1.50.

The reason we didn't say our range for LTR is $0.28 to $0.34 EPS -- that would be a full year basis. The reason we didn't make that additive is we did see a shift in the completion of the rebuild of the paper machine at PDM into the first quarter of this year. That was not in our previous guidance. We had planned to complete that in December.

So all things considered at this point we have more certainty of exceeding $1.50 but we're not prepared to add the LTR gain on top of the $1.50. I think the best way to state this in practical terms is the first quarter will be our most challenging quarter because of the downtime and once that's through we will have a better feel for how does the full year shape up. So we are more optimistic to exceed the $1.50 but by how much we're not prepared to say at this point.

Okay, so included in the current guidance then is as you mentioned the downtime. And also does it also include the costs of the LTR purchasing accounting there?

In the first quarter?

In the first quarter.

Yes, in the cost of the LTR purchase accounting, what that is is basically we're buying shares at above book value so we have to assign it to the balance sheet that premium and there's probably going to be a write-up of inventories and maybe a couple of tax adjustments. But the full effect of the purchase accounting probably will be less than $0.05 a share. It's not going to be hugely dramatic but it will be an initial negative.

Okay, are you still assuming an excise tax increase during 2008 at this point?

No, we are not.

Also you mentioned in the release something about Chinese costs expected during 2008. How high do you think those will go?

That's very hard to say because we're starting up a Greenfield mill in a very remote part of China where we're literally educating people to operate paper machines that previously have not. So the execution of the startup will really dictate how much onetime expense we have in getting the operation going.

The second aspect that is more certain to predict is the availability of volume to sell out on the machine. We expect that we will be able to gain cigarette paper sales quite readily and have revenue and be able to get into operations. Porous plug wrap will probably develop more slowly.

So at this point it's going to be negative. It's within our exceeding $1.50 estimate and an estimate for how negative the startup will go but in terms of the actual impact on '08 from the China startup it depends on how well the operation runs and how quickly the sales volume ramps up. And we have made projections for that but how accurate those are again it's really hard to say. We think we are covered. We think we have got a fair estimate of what the startup aspects will be.

And also, I guess there's still about 220 employees still to be let go? Can you give us some sort of timeline as to that?

That should roughly -- the two largest -- really it's down to that the Lee mill shutdown which will occur right now we're saying beginning in May so by midyear to third quarter we should I would say have most of the employees out. And then the other big wave would be at our French finished tipping facility in Malaucene which won't be until late this year.

So it will come in two waves essentially. A very small amount here in the first quarter with PDM but a big wave, mid-year and a second wave at the end of the year. So we probably won't see the full reduction until we look at January '09 headcount.

And the tax rate what are you looking for in '08?

I would say probably the best would be low 30s.

And just one last question, there was a restructuring gain in France. What was that related to?

We had over accrued for severance expense up through the third quarter so we reversed that in the fourth quarter because our final amounts of severance cost for both the PDM facility and our expected severance cost based on now settling with the Malaucene unions is less. And it's less because we have a different mix of people, a slightly different total number of people and we ended up negotiating a final rate that was less expensive. So we trued up our accruals and it all came through as a credit.

Ann Gurkin.

I wanted to start with this $1.50 guidance in China. I guess I thought China was going to be neutral to earnings this year and then additive in '09. So now you're looking for dilution from China this year, can it still be additive in '09? Is that right?

Yes, first full year of profitable results we would expect to occur in 2009. In terms of the negatives this year, it's really going to come down again to how the startup goes. But we will just like we have been seeing through the construction phase of the China mill it will not be positive to earnings.

In terms of how big of an effect on earnings that the China operation will have in 2008, how big of a negative effect -- it's not going to be the key driver for our business either way. The magnitude of the impact again comes down to how well we execute on the startup.

So we have been more conservative now in our outlook for the startup success as we get closer to it. So we have increased the amount of negative impact in '08 that we expect from the CTM operation in China.

You have increased the negative impact in '08?

Yes.

Because it's taken longer to start up than expected?

No, we are just hedging our bets on how well the startup will mechanically go.

Is that going to occur in the second quarter now?

Yes, right now the cigarette paper machine is expected to start up in the month of April or May and then the porous plug wrap machine would begin operations the current estimate is June or July. And mechanically, all is proceeding. It's really now in terms of the startup activities it will come down to having all of the various infrastructure systems set up -- utilities, power, steam, having the employees trained.

We are already receiving orders so it would be turning the machine, aligning it out, making quality product that's commercially is acceptable to share, having customer acceptance. So we are down to the operational aspects. The actual construction aspects are nearing conclusion.

Okay switching to France the downtime in France is that going to be comparable to what we saw in the fourth quarter?

I would say so. We have been down most of the -- in fact all of the month of January on one machine. The difference in December and therefore the fourth quarter was we were down for the holidays across all the machines in a number of our mills which is typical. So it's more downtime on one machine but it still has a negative effect. So I would say it's probably going to be -- it should be a little bit better than the fourth quarter but along the same lines.

Okay and the BAT contract with that added business, can you tell us what you project your capacity utilization will be in France and also adjusting for the restructuring in France?

On a percentage basis, I wouldn't say the number but we expect that capacity utilization across our French paper mills will be higher in 2008 than it was on average in 2007 because we moved both sides of the equation. We're shutting down capacity in '08 certainly especially with what's left to happen at PDM and Malaucene. And we've gained volume. So our capacity utilization will be improved a good bit versus what it was in 2007.

And the LTRI acquisition $0.28 to $0.34, what's the potential for upside to that range?

Pretty good. Not double or triple or anything remarkable like that but a pretty good chance that certainly we could be above the $0.28. ibeing above the $0.34 would be pretty good probably not that much. It depends on two aspects. One would be final purchase accounting and getting through all those pieces. But the bigger impact is what's happening with the base business.

And obviously based on our volume outlook that we stated for recon for 2008 we're pretty bullish on the business. And therefore if we do as well as we did in servicing that volume and running efficiently, we saw just a tremendous improvement in LTR profitability in '07 over '06. If we see a commensurate improvement with the additional volume we're getting, we have an upside to those numbers especially because we keep all of the earnings down.

Last what's the likelihood of additional restructuring activity in either the US or France beyond what you already preannounced?

There's obviously a risk of that or a potential for the need for that. Right now I would say that we're not planning any and I don't think we will foresee any further announced restructuring activities beyond what we have already got going in 2008. We're very focused on completing those restructuring activities and then kind of seeing where we settle out.

So there still is the potential. Volume to still declining. I'm sure you have seen the statistics that are coming out now where the US ended up in terms of cigarette production and consumption. So there still is the risk in the US primarily at our Spotswood, NJ mill but also there's risk in France. But there most likely won't be additional plans that would be announced beyond what we have already had -- or have going in 2008.

That's great, thank you.

[Don Newt].

Could you tell me a little bit about the BAT supply agreement whether it's it's at all similar to the Philip Morris agreement in that prices are relatively fixed but input costs are allowed to float? I think it's fair to say the nature of that agreement in Philip Morris did not turn out well for the Company. Could you assure shareholders that the agreement would BAT is not similar economics?

The way that the pricing works with the BAT agreement is it is set pricing for a product and therefore across a range of products. That pricing is eligible for adjustment during the term of the agreement based on several input factors -- currency, woodpulp pricing, other inflationary matters. But there's no guarantee in the pricing that the amount of our input cost increases will be covered by selling price increases from our customer. So we still are at risk in an inflationary environment where selling prices will not automatically cover increases in inflationary cost.

Well I think it's fair to say the inflationary cost inputs have been hurting you since the first quarter 2005. This is ten quarters now where inflationary cost increases have been hurting you and you have very little room to maneuver on the price side. Given that experience and given that investors have been sort of berating you over 12 quarters why do you insist on either A, negotiating these agreements in the first place but given the marketplace tells you this is the best you can negotiate why do you not hedge your energy input costs? You know that your risk is on the input cost side yet you have done nothing to do it and it just keeps going against you quarter after quarter.

Three responses on your question. First of an input cost directly we would not hedge as that would be quite speculative in terms of buying what would be clearly derivative products say based on energy price futures or natural gas futures trying to hedge underlying consumption levels.

Instead what we would do that would be closer to hedging would be forward buying contracts where we lock in rates through purchase agreements and that can be done on a number of our input cost. Energy is one effectively we do that with labor contracts. We can do it with woodpulp pricing because of woodpulp purchase agreements from vendors; other direct material inputs. But in terms of outright financial instrument hedging of input cost we would not do that. It's too risky both ways.

In terms of pricing with our customers I think the practical answer is that we have a very narrow number of customers who have significant leverage over us as a supplier and we can't not do business with them. And therefore they are successful in dictating the terms of the form of an agreement multiyear versus single year, purchase order versus contract, fixed pricing versus pricing that changes order by order. And we either play by those rules or you're not in business.

So the greater risk would be you can't walk away from Philip Morris, BAT and Japan Tobacco or we wouldn't have a franchise. So the pricing leverage issue is very difficult for us to say these are the terms by which we will do business.

I would encourage this discussion to go on at the highest level, the Board level. Your decision that use of more sophisticated hedging strategies is too speculative is fine. However essentially what you're doing in certain circumstances is donating shareholder capital to the Philip Morris Company or the British-American Tobacco Company. When you expose the Company's capital to depletion because you can't hedge away your energy costs you are giving away our money to Philip Morris.

So I understand your hesitancy to engage in something you deem as speculative but you're simply eroding capital to the benefit of tobacco companies or cigarette manufacturers. I'm not sure that shareholders would make that trade-off to avoid a speculative activity over just handing off capital. That's not necessarily a discussion that I think has been really had and debated at the Board level and I'd be interested to know to what extent the Board has explored that and to what extent they're willing to have that discussion.

First I'll complete the answer to your first question and then I will come back to your second question you just posed. The third answer to your first question regarding management of inflationary cost inputs, the key tool we have been using is cost reduction activities and we have been successful in both 2007 and in 2006 through very aggressive cost reduction activities which is our internal tool to offset inflationary cost increases thus the earnings has impact neutral to positive in both years.

In terms of your final question on Board review of hedging input cost, we have had that discussion. As we've mentioned here today we have changed our position on hedging currency in Brazil which is an example of where we are willing to use more exotic financial instruments to address input costs like currency or input factors. But in terms of a broad-based strategy to hedge all underlying inflationary aspects we -- it simply isn't feasible to do that with any certainty to not enter into multiyear agreements with our customers for pricing is something of course at a Board level they're quite aware of the nature of the business that we have.

Again it's theoretically perhaps interesting as an intellectual exercise to talk about the practically the majority of our revenue is with a few number of customers to say we won't play with you guys unless it's on our terms is not realistic. I hope that answers your question.

It does and I appreciate that. I think at some point you guys are going to hit a wall. You are exposing shareholder capital to loss based on essentially the energy markets and the woodpulp markets and if these things keep going the wrong way, shareholders are just going to say I don't need to take it on the chin because of the energy markets and that's what my investment in Schweitzer-Mauduit is basically exposing me to is depletion of capital based on the movements of the energy markets.

People don't want that. Shareholders want to be in the tobacco paper business. They don't want to be like I said exposed to loss in the energy markets. And if that is a recurring theme and it's been going on like I said for 12 quarters now, the shareholder base will erode. I don't think that's a positive for the long-term viability of the Company.

So it's something that the Board really ought to consider. You are placing this tremendous risk upon your shareholder base based on the energy markets and not really doing anything about it. It's probably one of the reasons the stock has gone essentially nowhere in years now. So I'm not going to belabor the point anymore but it's a big issue and I think it's a big picture issue that needs to be delved into a lot further. Thank you for your explanation.

Sure.

Jonathan Lichter.

On the RTL, did you have the backlog. I know you typically give the backlog at the end of the year.

The backlog right now I don't have offhand. But from an order standpoint we know enough about what our order patterns are expected to and what the requirements are from the key customers to have obviously the confidence to state the growth that we have terms of LTR unit volume sales. But in terms of the particular backlog right now I don't know that.

There no further questions at this time.

All right thank you for taking the time to join us today. Goodbye.

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