Mativ Holdings Inc (MATV) 2008 Q2 法說會逐字稿

Good morning. My name is LaTanya, and I will be your conference operator today. At this time I would like to welcome everyone to the Schweitzer-Mauduit International second quarter earnings conference call. (OPERATOR INSTRUCTIONS). At this time, I would like to turn the conference over to Mr. Peter Thompson, Chief Financial Officer. Thank you, you may begin.

Thank you, LaTanya. Good morning. I am Peter Thompson, Chief Financial Officer of Schweitzer-Mauduit International. With me is Mark Spears, our Corporate Controller. Thank you for joining us for a review of our second quarter 2008 financial results, which were filed with the United States Securities and Exchange Commission on Form 10Q yesterday evening. 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 report, including the Company's 2007 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 according with accounting principles generally accepted in the United States, and are therefore non-GAAP financial measures. I will now review the highlights of the second quarter of 2008 before providing additional discussion of key factors impacting our results.

Second quarter 2008 net income totaled $2 million, compared with net income of $1 million during the second quarter of 2007. Diluted earnings per share were $0.13, compared with $0.6 in the prior year quarter. Restructuring expenses, including amounts associated with the recently announced exit of the Coated Papers business in Brazil decreased earnings per share during the second quarters of 2008 and 2007 by $0.15 and $0.14, respectively.

Excluding restructuring expenses, earnings per share of $0.28 for the second quarter of 2008 increased 40% from $0.20 for the second quarter of 2007. Net sales were $202 million during the second quarter of 2008, a 17.6% increase over the prior year quarter. Approximately 50% of the increase, or $15.1 million was due to favorable foreign currency exchange rate impacts, while the bounce was due to an improved mix of products sold and increased sales volume.

Operating profit was $4.8 million during the second quarter of 2008 versus $6 million in the prior year quarter. Excluding pre-tax restructuring expenses, operating profit was $8.5 million during the second quarter of 2008, compared with $9.4 million during the second quarter of 2007, a 9.6% decline. The lower operating profit was primarily due to $9 million from inflationary cost increases, especially energy, $3.9 million from startup costs related to the rebuild of the paper machine at our largest French paper mill, PDM, and $1.8 million from unfavorable fixed cost absorption.

Partially offsetting these negative factors were higher average selling prices, including an improved mix of products sold of $7.6 million, increased sales volume of $3.7 million and lower non-manufacturing expenses.

Excluding restructuring expenses from each unit's second quarter 2008 results, the comparison to prior year quarterly results follows. The French segment's operating profit was $7.5 million, a decrease of $1.5 million. The U.S. segment's operating profit was $4.7 million, an increase of $900,000, and Brazil's operating loss was $2.5 million, compared with an operating loss of $400,000.

Interest expense totaled $2.8 million during the second quarter of 2008, an increase of $1.3 million from the prior year quarter due to higher average debt levels. We recorded no income tax provision during the second quarter of 2008, compared with an effective income tax rate of 28% in the prior year quarter. The difference in effective tax rates was primarily due to the favorable tax impact of our foreign-holding company structure and the geographic mix of taxable earnings.

Minority interest in earnings subsidiaries decreased from $2.1 million during the second quarter of 2007, to $0 during the current year quarter, as a result of our acquisition in January 2008 of the 28% minority interest in our French reconstituted tobacco leaf business, LTRI.

Net cash provided by operations totaled $20.3 million for the second quarter of 2008, compared with $8 million used by operations during the first quarter of 2008. Our current period net operating cash flow was positively impacted by a $10 million decrease in operating working capital and improved operating results. Capital spending was $5.4 million during the second quarter compared with $18.6 million during the first quarter of 2008, reflecting the absence of any major capital projects during the second quarter.

As a result of these factors, net debt decreased during the second quarter to $178.6 million as of June 30th, 2008, a decline of $10.7 million from March 31st, 2008, and a decline of approximately $40 million from the peak level reached in early May 2008.

Today, Schweitzer-Mauduit announced a quarterly common stock dividend of $0.15 per share, payable on September 15th, 2008, the stockholders of record on August 18th, 2008. I will now cover Schweitzer-Mauduit's business comments and outlook.

As expected, the second quarter 2008 financial results for Schweitzer-Mauduit improved both sequentially and versus the prior year quarter. Earnings increased primarily due to higher sales volumes for reconstituted tobacco leaf, or RTL, and cigarette paper used in lower-ignition propensity for LIP cigarettes. Additionally, we have benefited from the LTRI minority interest acquisition.

Our reconstituted tobacco leaf business continues to realize sales volume growth and increased earnings. Full year sales volume growth well above 10% is expected for 2008, and we plan to complete, during the third quarter, a capital project to increase capacity on our largest RTL machine by 10%. We continue to evaluate capacity expansion projects, including continuing efforts to gain governmental approval of a greenfield reconstituted tobacco joint venture in China.

Based upon the states that have passed LIP regulations, demand for this product is expected to grow from the current level of approximately 32% of North American cigarette consumption to approximately 80% by early 2010. In addition, jurisdictions representing essentially all of North American consumption have either passed or proposed LIP regulation, and several cigarette producers have announced voluntary national distribution of this technology, supporting the likelihood that LIP cigarettes will be sold nationwide by late 2009 or early 2010.

As a result, we expect to realize continued growth and demand for cigarette paper used in LIP cigarettes, which would continue to benefit our U.S. business unit's result. International LIP efforts are accelerating, especially in the European Union. Continued EU rule-making activities, including the passage in June of a mandate to proscribe an LIP-test protocol, indicate that it is increasingly likely, LIP cigarette regulations outside North America will become effective by 2011, and increase demand for cigarette paper used in these LIP cigarettes.

We expect this to be a positive development for us. We continue to expand our U.S. capacity for cigarette paper processing for LIP cigarettes, and have continued capacity planning activities for this technology in Europe. Operation of the recently-rebuilt paper machine at our PDM mill improved during the second quarter, but still contributed to an increase in production cost versus last year. We are now operating at a production level roughly equivalent to pre-rebuild rates, and expect further improvement during the third quarter.

However, due to continuing downtime to address poorer than expected performance, we project negative impacts from this rebuild to continue during the second half of 2008. Inflationary cost increases accelerated during the second quarter relative to the first. However, earnings were not as negatively impacted as during the first quarter, due to improved selling price realization, increased RTL sales volume, and improved cost savings performance during the second quarter.

During the first half of 2008, inflationary cost increases totaled $16.3 million or approximately $0.68 per share, well above the impact seen in the prior year. Energy cost increases caused half of this impact while wood pulp prices contributed about 30% of the increase, and a bounce was equally due to increased purchased material prices and labor rates.

The continuing rise in crude oil prices and the eventual resulting impact on the prices we pay for electricity, natural gas, fuel oil and specialty chemical costs, is expected to negatively impact our results for the balance of 2008. On the other hand, wood pulp prices have now been stable for the first 6 months of 2008, and we continue to project they will begin to decline by the end of this year.

Unfavorable foreign currency impacts lessened during the second quarter, primarily in France where we were successful in reducing our U.S. dollar selling price exposure. However, the Company in total, and in particular, our Brazilian unit, continue to realize unfavorable foreign currency impact, primarily from the strengthening of the real. This impact is partially offset by our Brazilian real currency hedging strategy implemented earlier in 2008, as well as from the conversion of some Brazilian unit's selling prices away from the U.S. dollar.

The overall restructuring activities initiated during the last 2 years across Schweitzer-Mauduit are progressing, despite the restart of the paper machine at PDM negatively impacting our first half of 2008 results. On July 1, we announced a further restructuring of our Brazilian operation with the exit of the coated papers business and an associated approximate 16% reduction in the work force. Progress continues to be made in both France and the United States in the transfer of base tipping paper production to Brazil.

During the second quarter, we ceased paper machine operations at the Lee mills in the United States, as planned. The shutdown of the Malaucene-based tipping paper machine is still planned to occur by the end of 2008. These actions, combined with selling price increase efforts in the markets served by our Brazilian unit, are expected to restore profitability to that site by 2009.

Bold realization of originally-expected earnings improvement from the restructuring actions underway across Schweitzer-Mauduit continues to be uncertain due to the other factors impacting our business, including prospects for continuing inflationary cost increases and a weak U.S. dollar. Given the accelerated rate of inflationary cost increases and unfavorable currency impacts, we are further evaluating action to curtail operation of our certain of our paper machines, and are engaging our customers in price negotiation.

Decisions regarding any further restructuring action could be forthcoming during the second half of 2008. During the second quarter, progress continued with the startup of our greenfield cigarette paper and porous plug wrap joint venture in China. We continue to expect positive earnings contribution from this investment during 2009.

We are pleased with the improved performance seen in the second quarter, both in terms of earnings and cash generation. Increases in sales of reconstituted tobacco leaf products in France, especially given full ownership of this business, and cigarette paper for LIP cigarettes in the United States are expected to further benefit earnings this year and beyond. However, significant improvement in our traditional tobacco papers business is less certain. Schweitzer-Mauduit faces continuing challenges for further earnings growth in the second half of 2008, primarily as a result of persistent inflationary cost increases, unfavorable foreign currency impacts, ongoing implementation of customer pricing actions, restructuring activities underway across the Company, and the startup of our new joint-venture paper mill in China.

We project that quarterly earnings per share, excluding restructuring expenses, during the balance of this year will approximate the level seen during the second quarter, with full 2008 earnings ranging between $0.75 and $0.90. This equates to an annualized rate of earnings, excluding restructuring expenses, in the range of $1.00 to $1.20 per share. Further, we expect cash generation, working capital, capital spending, and other cash uses to be relatively stable through the balance of 2008, and therefore anticipate additional borrowing of approximately $10 million, well below the peak debt levels experienced earlier this year.

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

Thank you. (OPERATOR INSTRUCTIONS). Your first question from the line of Jonathan Lichter with Sidoti & Company.

Morning.

Hello, Jonathan.

The French paper machine-- you mentioned that there will be additional downtime, but would the comparison be favorable relative to Q2 and Q3 and Q4?

We would hope it would be favorable in Q3 and 4 sequentially, so, every quarter getting better. At this point, with the progress that we've made so far, the remaining issues that are to be solved are going to be tougher and tougher to get because we've gotten all the low-hanging fruit in terms of improvement, so, the rate of improvement we saw in the second quarter versus first is probably going to be greater than the rate of improvement we'll see in the third versus second and fourth versus third.

So, at this point, we do expect improvement, but it is somewhat with reservation as to how quickly we will be able to get fully to our expectations. My hope and expectation is, though, that where we are right now in operation, we're not going to be reporting much of any of a negative financial impact year over year. In other words, we're back to essentially pre-rebuild levels of productivity.

So, in the second quarter I guess you had mentioned or in the release, it's $3.9 million, so in the third and fourth quarters, it should be closer to break even?

Yes, because that 2.9 was reflecting year over year comparison, so it would be closer to break even but, again, I'm going to give a caveat that if-- that's our expectation, our best case, I think the reality is, we'll probably fall short and still report some negative impact.

What's very hard to predict about that is, how much downtime are we going to need during the troubleshooting process where we make incremental improvements, try them out, some are successful, some are not, and when they're not successful results in unproductive periods, which you recover, then, when you go back to making normal, sellable grade paper, but you're still cumulatively not at the same levels of operation as you were historically, so it gets very difficult to predict what success we'll have with improvement when by their definition, their efforts make improvement that you don't know, really, until you've empirically demonstrated that it can be achieved.

So, right now, we're saying sequential improvement, but I would not expect third quarter versus second or year over year, to be 0 in the third quarter.

Okay. And then moving to Brazil, should the-- shouldn't the losses there sequentially shrink as we move ahead as well?

They should, especially given now that in the second-- or in the third quarter, right at the start of it, we've exited the coated papers business. The real driver of going-forward earnings improvement is going to be the success that we have in realizing price increases, and the pace at which we transfer base tipping volume, and those are expected to begin and kind of ramp up in the second half of this year, but the pace of selling price increases probably isn't going to reach a full peak until the first of the year, when some of the major accounts have adjusters that come into play, which would be positive for pricing.

So, there should be some improvement, but probably not a marked improvement in the third and fourth quarter. The more marked improvement should come in the first quarter.

Okay. And what do you expect out of China? With the losses-- the $600,000 this quarter, is that-- will it be similar in the third and fourth quarters?

Yes, I would say the same or slightly better. It depends on the same thing there, the rate of-- it's PDM, the rate of qualification of the customers, and then how fast we can start selling paper and selling orders, which will kick in the revenue side and would pretty quickly make a positive effort or a positive contribution as a result.

Right now, that qualification effort with customers is proceeding very well. Operationally, we're having a good start up for our Greenfield operation, so it's really down, now, to completing the customer qualifications and then staring-- initiating the sales process. So, I would say it would be unlikely that we would be much worse than what we saw in the second quarter, and the opportunity would be to improve from there, and then, of course, full-year 2009, we still expect to have profitable operations for the full year.

And lastly, energy-- is there any reason to think that it will be worse in Q3 relative to Q2 when it was negative by, I think, $4.8 million?

Right. No, I would not expect so. With launching-- knowing what our energy contracts are doing and what spot rates have done, which even if we have contracts in place, we're still always on spot purchases, it doesn't look the rate of increases in energy cost are going to be at the same pace as they were in the second quarter, and historically, the third quarter, coming into the fall, is one of the more benign rate periods for energy. The winter months can be the more severe.

So, it looks pretty good that the third quarter will be no worse than the second quarter, but probably not an improvement on the second quarter.

Okay, thanks.

Thank you. Your next question comes from the line of Ann Gurkin, Davenport.

Good morning.

Hey, Ann.

I wanted to start with, I guess with the comments you made in the 10Q about price increases of 20% in North, Central and South America. Can you break out where you got that pricing-- where the bulk of that pricing came, and which region?

That would be primarily with independent accounts, so non-majors, and the up to 20% would be the peak. The average would be-- of this most recent round, would be more-- a range between 10% and 20%, and it would have been equally applied across all of the markets served by Brazil, so, with cigarette paper coming into the North American market, all of the products, cigarette paper, plug wrap, and base tipping paper sold throughout the Latin American market, that range of pricing of 10% to 20% would have been equally applied, but it's 2 independent accounts. So, roughly, that's approximately a third of our sales of the Brazilian unit are to independent or non-major accounts.

Okay, and then, is there potential for additional price increases, for you to be successful in negotiating additional price increases, in the second half with other either major accounts or independent accounts?

Yes, that would be the intent is that we would be continuing negotiation efforts not just for Brazil, but globally, with Brazil still being the most aggressive, and those would be with multi-nationals, especially as any contracts would come up late this year, then the effectiveness of those increases would be more towards the first quarter, as I've just mentioned in the previous answers to the Brazil situation, we would expect to see probably our most marked increase in selling prices come in the first quarter of 2009. That's when some of the multi-national accounts either would have new pricing become effective through automatic adjusters, or through successful negotiation.

Okay, with the restructuring you have announced in Brazil and with the pricing you've gotten so far, can that business turn profitable in 2009?

Yes, that's our projection, that's our expectation.

For the first half of '09?

Yes. Starting, really, in the first quarter. The 3 key drivers are the exit of coated paper, the actions to move base tipping paper production to Brazil from both the U.S. and from France, and then price increases. So you have the real caveat, of course, is, what happens continuing with currency, but our pricing actions do include lessening our exposure to the dollar, and we've been pretty successful with that, but the-- some of those three with base tipping paper transfers still continuing into 2009 won't be done on January 1, but it will be largely in place, is our expectation.

We would expect that-- we'll come out of the blocks in 2009, you know, near break-even or profitable, and generate a modest profit for the full year.

Okay, switching to RTL. With this strong double-digit growth, is there any risk to an inventory build with various customers and that we might see a slowdown in the back half for that business?

No, that's not our expectation. We're actually holding the line on inventories right now. We would have a tough time building much of an inventory level at the present, so, no, I don't think that will be any type of an issue.

Okay, then, I'm sorry, going back to the plant downtime in France, on the-- excluding the PDM line, are you taking downtime in your facility-- your other lines in the fourth quarter like you normally do?

It would not be for-- not of any great expense. It would only be for normal holiday down. There is, at this point, no significant inventory correction downs that we're expecting, really, anywhere.

So, that's an improvement from last year with PDM.

Well, as you know, and following, we typically do have a weaker December within the fourth quarter and therefore, the fourth quarter, historically, the last 2 have been bad prior to that. We've had fourth quarters sometimes be pretty good, but, specific to an inventory correction or a planned machine downtime, at this point, we do not expect anything significant.

Okay, great. Can we get an update on negotiations with Philip Morris USA regarding their cigarette business? Where do we stand with that?

Well, on cigarette paper, and, once the SSA ends, which is the end of this year, in 2009, with the significant move towards LIP, which is covered under a surviving agreement, of course, that has commercial terms already spelled out, there's really not much of a conventional cigarette paper negotiation left to have, so we haven't had any specific conclusions or, even, really definitive negotiations with PMUSA on conventional cigarette paper pricing or sourcing.

I would, again, expect that that will become, if not the top priority, because the volume is lessening, and that will become more of a likely one-year agreement or even a purchase order type business, and, of course, we would be seeking to have price increases as we consistently are doing elsewhere in the world, but nothing specific has been negotiated.

Again, I emphasize, the cigarette paper negotiations for conventional product are kind of a small tip of the iceberg because the majority of the paper starting in '09 will be LIP paper.

Okay. And then, going back to energy, is there a potential that energy costs, if they continue down, like we've seen, you could get a slight benefit in the fourth quarter? Or less of an impact?

Less of an impact. I think flattening out, I-- we wouldn't-- it would take a pretty marked change to see any type of a benefit. Now, we did start to see the real ramp-up in energy in the fourth quarter of last year, so I guess there's a possibility that year over year it could be somewhat favorable, but, generally, I think the best we can expect is a flatter inflationary environment, not as severe as the last three quarters in a row, but I would not expect it to be swinging positive.

That's great. Thanks, Steve.

Alright.

Thank you. (OPERATOR INSTRUCTIONS). Your next question comes from the line of Thomas Russo, with Gardner, Russo and Gardner.

Hi, Pete.

Hello, Tom.

Hi, a couple of questions. Is there anything going forward that you envision will substantially add to the RTL volumes in France over the course of the next 12 to 18 months?

I think the biggest thing that will continue to benefit RTL's volume is the move of cigarette production from PMUSA to PMI, and we continue to realize increased volume as a result of that production, and that's a significant part of the increase in RTL volumes, and that transition is not fully in place yet. The others--

How much have we picked up so far and what's your (inaudible)?

Right now I'm-- because it's a process in movement, I would say that we're probably over half way done on a pace that we're kind of in the second quarter, the rate of sales volume would be to what we would expect it to fully be is probably three quarters of the way there, so we would expect some more growth. That's why we can say, if you're halfway through the year, we expect well above 10% full-year growth and-- in volume.

Then, going forward, I think RTL growth in 2009 will be more flattish. We'll see back to single-digit growth, not the more rapid rate of growth we've seen over the last-- now it will be coming up on two years.

Okay. As to the ramp-up in China, does the fact that all three units commence production of Marlboro through their joint venture with the CTC in China already start to have an impact-- as they ramp it up, how will that affect your business there?

That's not expected to be a specific source of key volume growth. The key volume growth for the cigarette paper joint venture will really be general sales to targeted cigarette accounts that are domestic in China, so that would not be expected to have positive, but not expected to have a key impact on our CTM sales outlook.

Okay, and then just as-- as a highlight what's developing, if anything material, in the Philippines or Indonesia?

The biggest thing that's happening with the Philippines and Indonesia and, financially, those results are included in our French segment, so it's hard to see them specifically, Indonesia's a fairly stable operation. We're pleased with the margins we have there. We haven't seen great volume growth, but that's more reflecting what's happening within the Indonesian market.

The Philippine operation we have been very, very pleased with. We've had a significant improvement in operational performance, we're very happy with the improvements in profitability that we've seen, and we're pretty optimistic about what our growth prospects can be out of the Philippines.

And is there any reason why those are going to be sort of gapping up, or non-linear in terms of the development? Anything that's sort of-- a step change that will affect either one meaningfully?

At this point, no. The biggest thing would be-- that would be a step change in the Asian region outside of China would be if we would be successful in either adding capacity because of increased market demand or an opportunity to significantly increase our share at any of the multi-nationals present in Southeast Asia, or the addition of new lines of business, but, at this point, there's nothing specific that would be on the horizon.

And so to increase your involvement with the multi-nationals would in turn, then, lead to the increase in capacity to serve them?

Yes, that's right.

Okay, thank you.

Thank you. (OPERATOR INSTRUCTIONS). And at this time, we have no further questions. Mr. Thompson, I return the conference to you for closing remarks.

Alright, well, thank you, and if there are no more questions, thank you for your time and joining us today. Goodbye.

Thank you. This does conclude today's Schweitzer-Mauduit International second quarter earnings conference call. You may now disconnect.