Mativ Holdings Inc (MATV) 2008 Q4 法說會逐字稿

Good morning. My name is April and I will be your conference operator today. At this time I would like to welcome everyone to the Schweitzer-Mauduit fourth-quarter 2008 earnings release 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. Fredric Villoutreix, you may begin your conference.

Thank you, April. Good morning. I am Fredric Villoutreix, CEO and Chairman of the Board of Schweitzer-Mauduit International, and along with Pete Thompson, our CFO, will be leading our conference call today. With us is Mark Spears, our Corporate Controller. Thank you for joining us as we review our fourth quarter and full year results.

I will discuss the key factors impacting our business then Pete will provide highlights of full-year and fourth-quarter 2008 financial results. A more detailed review of fourth-quarter financial performance is included in our earnings press release issued this morning. A copy of the press release can be found on our website.

The comments included in today's conference call constitute forward-looking statements. Actual results may differ materially from the projected results. Certain financial measures discussed during this call exclude restructuring and impairment expenses and are therefore non-GAAP financial measures.

I will now review the highlights of the full year and fourth quarter 2008. Earnings per share excluding restructuring and impairment expenses were $0.97 for the full year and $0.14 for the fourth quarter. The fourth-quarter results contain approximately $0.13 per share from tax impacts associated with the reorganization of legal entities and severance expenses associated with management changes, primarily in France.

Excluding these items as well as the items losses from startup of our China joint venture paper mill and final costs on the shutdown of the Lee Mills, our business improved compared to fourth quarter 2007. As we continue to realize benefits from increased sales volume for reconstituted tobacco leaf and cigarette paper for lower ignition propensity cigarettes and we began to realize favorable foreign currency impacts and a lower level of inflationary cost increases.

Our most significant achievement in 2008 was the purchase of a 28% minority interest in our reconstituted tobacco leaf operation in France, LTR Industries or LTRI. We completed this $51 million acquisition in January 2008 and thus retain for our shareholders 100% of the substantial earnings improvement during the year caused by a 21% increase in sales volumes.

The LTRI acquisition was accretive to earnings by $0.32 during 2008. 2008 was also a very strong year for our cigarette paper for lower ignition propensity cigarettes or LIP. Our LIP paper sales volume grew 56% during 2008 as regulatory requirements across North America reached an estimated 34% of cigarette consumption by year-end. Essentially 100% of the North American market for cigarettes will be LIP by January 2010 thus we expect to realize even greater increases in sales volume of this value-added product during 2009.

We continue to maintain our leadership position in LIP technology and are advancing plans to expand our capacity outside of North America to meet demand as other markets move toward implementing LIP regulations. Currently, Australia, the entire European Union, Finland, South Africa, South Korea, and the Philippines have taken action towards implementing LIP regulation. We expect demand for LIP outside of North America to begin by late 2009 with the EU likely to require compliance by 2011 or 2012.

Let me now turn to cost initiatives. We made significant progress during 2008 implementing restructuring actions in France, the US, and Brazil initiated since 2006. Essentially all restructuring-related expenses for these actions have been recorded as of year-end 2008.

The key achievements are in France progress continues to be made in implementing our strategy to become a low cost and the highest quality cigarettes and long fiber paper manufacturer in Western Europe at our Papeteries de Mauduit or PdM mill. The capital investments including improved performance of the rebuilt paper machine, workforce reductions, and other paper machine restructuring activities are in place and improvement in operations was realized during the fourth quarter.

In the US, the Lee Mills facility in Massachusetts ceased operations earlier in 2008. Production of certain of these products has been transferred to other locations including base tipping paper to our Brazilian mill and the sale of remaining assets is progressing.

We exited the non-profitable coated papers business in Brazil in mid-2008. The restructuring actions announced for the Malaucene Mill remain to be fully implemented, but severance expenses associated with announced plans have substantially all been recorded. All these restructuring actions will benefit annual pretax earnings by approximately $25 million.

Now a word on Brazil. The currency situation in Brazil has become more favorable and along with selling price increases and the transfer of base tipping paper production from the US, we expect substantially improved operating profit in 2009. We generated a near breakeven level of operating profit during the fourth quarter of 2008 despite $1.1 million in unfavorable impact from currency hedges placed earlier in the year.

These unfavorable hedges expired at the end of December and we have rehedged approximately 50% of our net US dollar exposure in Brazil at a favorable exchange rate for all of 2009. We are currently evaluating placement of additional hedges extending into 2010.

Now a word on China. Our 50% joint venture paper mill in China, China Tobacco-Mauduit, or CTM, has begun to realize growth in sales volume following a slower-than-expected customer qualification period. Sales volumes and new customer orders for cigarette paper are now growing steadily and we expect these to continue throughout 2009 as we work to sell out the mill. Operations are improving. Our sales volume grows and enables more efficient paper machine operations.

Recently we announced several executive level organizational changes including Pete's return as CFO and Head of Strategy and the appointment of Otto Herbst replacing me as Chief Operating Officer. Otto brings nearly a decade of success in leading our Brazilian and more recently US operations to his expanded role. I have now put into place my leadership team and I am confident we have the right people, skills, and experience to achieve our business objectives in 2009 and beyond.

I will now cover our business outlook for 2009. Despite the significant challenges faced by our base paper business throughout 2008, we are confident that Schweitzer-Mauduit is on track to achieve improvement in reserves as demonstrated by earnings increases during the second half of 2008. The key drivers are, first, growth in reconstituted tobacco leaf and LIP papers expected to continue during 2009. Second, improved operational performance from the rebuilt PdM paper machine.

Third, our Brazilian business now expected to generate a substantial improvement in operating profit during 2009. Fourth, we have completed global customer negotiations and achieved results in line with our expectations and goals for 2009. Fifth, we are now gaining sales volume at our new paper joint venture in China and expect to narrow losses progressively throughout the year. Finally, inflationary cost increases are expected to continue to moderate given worldwide recessionary impacts with lower purchased wood pulp already having provided a benefit to earnings during the fourth quarter.

An emerging challenge to our business is poor worldwide economic conditions which will likely cause increases in cigarette taxation and could lower levels of disposable income among smokers especially in developing countries thus negatively impacting demand. The US federal government passed yesterday legislation for child health care programs funded by an increase in cigarette and other tobacco product excise taxes in excess of $0.62 per pack. Further, we continue to evaluate our best to balance our capacity for traditional paper products in France and the US to available demand and will likely announce additional restructuring actions during 2009.

We expect that earnings will improve during 2009 as the positive aspects of our business are expected to counter these and other challenges. The expected earnings and cash generation improvement during 2009, coupled with our existing debt capacity supports our strategies to transform Schweitzer-Mauduit through growth of our high-value franchises for reconstituted tobacco leaf and cigarette paper for lower ignition propensity cigarettes while we continue the necessary restructuring of our operations to balance capacity between our Western and developing country locations.

Although we are fully expecting to realize earnings improvement during 2009, volatility in quarterly earnings will likely persist. Earnings per share excluding restructuring and impairment expenses are expected to improve over 2008 levels. However, the extent is difficult to project with certainty given the breadth of factors impacting results. As conditions warrant we will provide updates of our full-year 2009 earnings outlook.

I will now turn to Pete to cover highlights of our financial performance.

Thank you, Frederic. I am happy to be back as CFO and enthusiastic about the opportunities in our business. I will now review our recent financial performance and outlook. Net sales increased versus 2007 by 7.4% for the year and declined by 6.2% for the fourth quarter. Both the full year and quarter benefited from higher average selling prices, however, the weakening of the euro compared to the US dollar in the fourth quarter partially offset favorable impacts experienced during the first three quarters.

For the full-year sales volumes declined 1.2% due to closure of the Lee Mills and our exiting the coated papers business in Brazil. In the French segment volumes increased 8.8% due to higher sales of reconstituted tobacco leaf products. Sales volumes of cigarette paper for lower ignition propensity cigarettes also increased during 2008.

Restructuring and impairment expenses were $22.1 million in 2008 compared with $24 million in 2007. The 2008 expenses mostly related to asset impairments of $13.5 million recorded in the fourth quarter for write-downs taken on certain French paper group assets given continuing losses that triggered required impairment testing under US GAAP. Nearly all announced restructuring activities were completed during 2008 except for the shutdown of the Malaucene, France, base tipping paper machine, which has been postponed until the late first or early second quarter of 2009 pending ongoing customer qualification.

Operating profit excluding restructuring and impairment expenses was $39 million for the year and $11.3 million during the fourth quarter compared with $41.9 million and $5.5 million for the respective periods of 2007. The decline in full-year operating profit was attributable to higher inflationary costs which decelerated in the fourth quarter to one-third the rate realized during the first three quarters of 2008. These higher costs were partially offset with higher average selling prices and the benefits of cost savings programs.

Fourth quarter 2008 improvement in operating profit was primarily due to higher average selling prices, primarily due to a favorable mix of products sold of $12.8 million, benefits from higher sales volumes of RTL and LIP products, and improved mill operations in France and the United States partially offset by inflationary cost increases of $5.8 million. As expected, fourth-quarter results were negatively impacted by lower demand late in the quarter resulting from reduced customer operating schedules.

Higher energy costs caused about 50% of the $30.4 million of the 2008 inflationary cost increase. Per ton cost for purchased wood pulp and other materials added another $10.5 million. The average per ton list price in the United States of northern bleached softwood kraft peaked in July and August at $885 before declining to $735 in December, and is now 16% below the prior year level. Declines are expected to continue in 2009 and provide year-over-year improvement to earnings.

The loss from our 50% joint venture paper mill in China was $4 million for the full year and $2.2 million during the fourth quarter. Losses are expected to narrow in 2009 as sales volumes improve.

Net debt increased 73% to $167.9 million at year-end compared to the prior year-end with an increase of $8.8 million during the fourth quarter primarily due to payment of accrued restructuring-related severance liability. The full-year increase was primarily due to the $51.3 million purchase of the minority shares of LTRI in January.

Our debt-to-capital ratio at year-end was 39.3% versus 21.5% in the prior year. We had $73 million of contractual availability on our credit and overdraft facilities at December 31, 2008. Full-year 2008 capital spending was $35.3 million of which $5.3 million occurred during the quarter. We spent $9.7 million in restructuring-related capital investments in 2008.

Operating cash flow decreased to $33.3 million for 2008 versus $71.3 million in 2007. During 2008 we paid $15.1 million in restructuring-related severances and made $5.2 million in contributions to our pension plans. Capital spending for 2009 is currently expected to range between $20 million and $30 million. The reorganization of legal entities is projected to reduce annual cash taxes paid by approximately $20 million beginning by the second quarter of 2009.

Other cash needs including pension funding and capitalized software spending are projected to be in the range of the $20 million to $30 million. Net debt is projected to reach $180 million to $190 million during the first quarter of 2009 due to expected pension funding requirements.

Earlier today Schweitzer-Mauduit announced a quarterly common stock dividend of $0.15 per share payable on March 23, 2009, to stockholders of record on February 23, 2009. That concludes our planned comments. April, please open the phone lines for questions.

(Operator Instructions) Jonathan Lichter.

How much did the Lee Mills shut down cost? I think in there there was -- you said there were $2.2 million worth of costs overall, but I don't think it broke it down.

Jonathan, in the fourth quarter -- the answer to your question in total, the Lee Mills shut down in 2008. The restructuring expenses that we took were $1.9 million. What we alluded to in the fourth quarter is we had about $1.4 million in costs associated with shutting down Lee that were not restructuring related.

$700,000 of that was due to an accrual for a repair to one of the water dams that we have on the site, so it really had nothing to do with restructuring. It was repair that we needed to make in order to hold the integrity of that damn. The other $700,000 that occurred during the quarter was cost associated with the final winding up of activities at the site.

So those you wouldn't expect to recur then?

No.

Okay. Is that the higher maintenance that you were referring to in another area of the release?

Yes, that is part of it and then typically in the fourth quarter we do have higher maintenance expense. And we did also add our Ancram and Spotswood facilities in the US.

How much of the restructuring benefit will we see in '09? I guess the overall annual number is $25 million. How much did we see in '08?

The best way to think about that, roughly half of the $25 million is the labor savings with the downsizing, primarily in France at PdM. And that is largely in place now. We have a very small percentage of that yet to go.

And that was put into place progressively over the last two years, so it's essentially all in place now. So half of the $25 million is inner results from the first quarter going forward, a little bit further to go. That benefit does not count the difficulties we had with the start up of the Number 10 machine at that site. So we also expect on top of half of the $25 million, we also expect improvement out of France with improving base of operations on the PdM Number 10 machine.

The other half of restructuring benefit is somewhat split between the US and Brazil. With the Lee Mills now, essentially, fully down we are seeing that benefit on a going forward basis in place starting really here in January. So we will see that on a going forward.

The difficulty with the Lee Mills benefit is over the last two years, once we announced the shut down of Lee, we had poor results at Lee which is why we shut it down. Then we built inventory for about a nine-month period, late '07 into '08, and that benefited results because we were building inventory and absorbing overhead.

We unwound that inventory now, finished that all up in December so we have got kind of a mix of results in the past. But from here forward Lee is gone and the losses that we were incurring at Lee go away. Then we get the benefit of having transferred base tipping production to Brazil along with the restructuring in Brazil and that brings substantial benefit going forward.

So I would say the best way to think about restructuring, the short answer is we have seen roughly half of the $25 million. The other half will be fully realized this year and you will really see it in all three business segments -- US, France, and Brazil.

Okay. Lastly, the difference I guess between what you have had as guidance last year -- last quarter, I'm sorry -- and this quarter is that all just related to your thinking on the overall economy and I guess the earlier passage of the SCHIP bill?

The SCHIP bill really did not factor in at all. That is consistent -- the actual amount of the tax increase and the timing are too close to call in terms of being any different than our original thinking. So, no, that doesn't impact it specifically. The reason we are on providing a specific earnings guidance number is, much like most publicly-traded companies, the uncertainty and the current economic environment makes predicting our business much more difficult.

If we knew right now that the current rate of lower inflation, selling prices, and volume were stable, we would be indicating very positive earnings guidance coupled with the improvements we expect in our business. The thing that we can't say with certainty is as quick as oil prices and wood pulp prices drop, as much as there has been a worldwide economic contraction in activity will that show up as higher inflation later this year, significantly lower demand for cigarette consumption, and therefore impact our business one way or the other.

So it's really the macroeconomic conditions that are causing us just like essentially all other companies to not provide a specific earnings guidance.

But if economic conditions were the same as they are now throughout the year and you held the other factors steady, what kind of outlook would you think you would expect?

Positive. The factors within our control we are quite positive about. As Frederic reviewed, the litany of things in front of us are all better. France will perform better, especially with the Number 10 machine improving. We still have restructuring activity ahead of us in the US and in France that is an unknown at this point; that is a headwind. But that aside we are looking at a better operating situation in France.

In the US we have the benefit of LIP. Again, out of France we have got further recon growth. We won't have 21% growth like we did in '08 again in '09, but we do expect further growth. Narrowing of losses in China and then the very important swing to what we now know given currency will be a pretty healthy operating profit from a pretty significant operating loss in Brazil.

So the factors within our control, we are quite bullish about the outlook of our business. And if we didn't have the worldwide economic conditions, which is a big if, we would be most likely increasing our earnings guidance from last quarter.

And so it is the current weak economy not inflation later on that you are concerned about?

Both. I would say first would be concern about volume. If the economy stays depressed and unemployment keeps rising worldwide, eventually two things will happen -- taxation is going to go up in the Western world just like yesterday's announcement on SCHIP. That will drive consumption lower in North America and in Western Europe and in Japan.

And then in developing countries -- the last time we saw this was in the Asian economic crisis of the late '90s. If disposable income drops significantly in developing countries, cigarette consumption will drop with it. That will show up to us as reduced demand for our products and heightened competition. So that is the concern that we have from a macro basis impacting our business as the year goes on and if the economy continues worldwide to be depressed.

Okay, thank you.

Ann Gurkin.

Good morning. For 2009 can you increase RTL volume still double digits? Is that still the target versus '08?

I think we are still positive in terms of continuing to grow the business. However, it's fair to say that the growth rates we have realized the last few years are not sustainable on an ongoing basis. So we see some growth probably at a rate [just baked].

So back to the long-term target of mid to high single-digits, is that fair?

Yes, that sounds reasonable. That is reasonable.

Then baked into your outlook right now in the US, can you comment on what you forecast for domestic cigarette volumes?

Yes, we specifically took into account a normal, what has been more normal here the last several years of a 2% to 4% decline in cigarette consumption plus the impact of SCHIP. So we have a fairly significant negative one-time impact from SCHIP that we built into our thinking about 2009 volumes in the US.

So that is in your comments that you made today?

Yes.

Ann, if I may, keep in mind that our franchise wrapper and binder that serves the small cigars is likely to be more impacted than the average paper business supplying the cigarette industry.

Okay. So if I start with the $0.97 reported in '08 and if you add back improvement for Number 10 PdM currency, favorable currency, I think you should pick up a little bit more from the LTRI acquisition and then any benefit from restructuring, you are easily at $1.20 which was the number you all had kind of indicated you would meet in last quarter's press release.

So I guess can you help a little bit more? I know you just talked about this a little bit, but what are we missing?

I don't think you are missing anything. The positive items that you listed and then add to that Brazil and narrowing losses in China will all be positive for the business. The only negative that we would really have is the macroeconomic issues plus any further impacts from restructuring should we decide to do anything further. And that would potentially hurt us significantly in terms of earnings.

So absent what we don't know, we would be giving guidance that is probably more bullish, more upbeat than we gave last time. However, with so much uncertainty we think it's more prudent not to give any guidance at all.

Okay. At what point or what data point or what timeline should we look for when you all will give more concrete --?

I think what we will do is as quarter by quarter goes by -- I don't think we will do anything outside of earnings releases. As quarter by quarter goes by, obviously, we can talk more specifically about what have we achieved and what is in our control outlook. Then that will give more visibility as to what is happening with the overall economy as time goes by.

So I say we are to -- each quarter we will make a decision do we give specific guidance. But at each quarter we will for sure say, qualitatively, where do we see earnings going.

Okay. Moving to China, we had that slightly positive contributor to earnings in '09, so I think that is too aggressive. Are results in China going to be more flat to down a couple of pennies this year?

I would say that given the -- from where we ended up in 2008 on China, the best way to think about it is we will narrow losses through the year, ideally getting to a near breakeven or slightly positive level by the fourth quarter of 2009. Of course that was the original expectation for the fourth quarter of 2008. So we are going to see about a year-long delay in getting to that point.

Now the rate at which losses go from $4 million -- our share of losses in 2008 was $4 million, $2 million in the fourth quarter. How quickly that goes to zero is hard to say. Obviously, what we are working to do is build sales as quick as we can. Ideally, we will see good efficiency off the paper machine and good cost performance but that is harder to predict. But it will be moving from where it is towards zero as the year goes on. But what that line looks like is hard to project.

Then if you could update -- in the press release you all commented on your success in negotiating contracts and pricing with customers last year, particularly towards the end of last year. Is there a growing risk that those pricing are going to stick as we move further year or are you getting pressure from customers to give back some of that margin?

I would say, Ann, that our concerns are more the impacts of the global economy and price increases on volume, which in my mind would be more in the second half of the year, which could affect the volume commitment of our customers. I think in terms of pricing, the pricing that we have negotiated is good for 2009. However, the situation of the economy, inflationary factors, and volume demand situation will certainly impact the picture as we look towards 2010 pricing.

That is great. Thank you all.

At this time there are no other questions in queue.

Okay. All right then. April and all on the call, thank you for joining us today.

Thank you, sir. You have a great day, sir. This concludes today's conference call. You may disconnect.