Mativ Holdings Inc (MATV) 2009 Q1 法說會逐字稿

Good morning. My name is Andrew and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter Schweitzer and Mauduit earnings 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. Frederic Villoutreix, you may begin your call, sir.

Thank you, Andrew. Good morning. I am Frederic Villoutreix, CEO and Chairman of the Board of Schweitzer-Mauduit International, and along with Peter 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 first quarter results.

I will discuss the key factors impacting our business, then Pete will provide highlights of the first quarter of 2009 financial results. A more detailed review of first quarter financial performance is included in our quarterly report filed with the Securities and Exchange Commission yesterday evening. A copy of these reports, along with our earning release issued earlier this morning and updated investor presentation 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 results suggested by these comments for a number of reasons which are discussed in more detail in the company's Securities and Exchange Commission filings, including our 2008 annual report. Certain financial measures discussed during this call exclude restructuring expenses and are, therefore, non-GAAP financial measures.

I would like to begin by stating that we had an excellent first quarter with strong operational and financial [developments] across the Corporation. We reported all-time record earnings per share in our public company history, besting the previous record established way back in the second quarter of 1997. EPS totaled $0.88 for the first quarter of 2009, excluding a $0.01 in restructuring and impairment expenses compared to $0.01 earning in the prior year quarter. Net income for the first quarter was $13.3 million compared to a net loss of $1.2 million during the first quarter of 2008.

The key drivers of our improved first quarter of 2009 results are, first, growth in high-value products, including cigarette paper for low ignition propensity cigarettes and reconstituted tobacco leave, improved operational performance from the rebuilt paper machine in France and good execution across the board during the quarter in our continuing cost reduction efforts.

Our Brazilian operation generated substantial improvement in operating profitably during the first quarter of 2009, as a result of our strategy to concentrate production on higher value tobacco products increasingly servicing the North American markets, combined with improved pricing and much more favorable currency situation.

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 first quarter.

The one dark spot during the first quarter was a 6% decline in core tobacco-related unit volumes, including the impact of volume transfers to our new joint venture operation in China.

Let me further comment on the actual volume trends during the first quarter and our expectations for the rest of 2009. First and foremost, we were able to offset the impact of the first-quarter volume decline on our financial results in part for the actions of the last several years to decrease our higher cost capacity, especially in the US and France. Our volume decline during the quarter primarily reflect changes in the North American markets, especially the US, which was impacted by anticipation of an [8.1] tripling of the federal excise tax. The two largest US cigarette companies reported first quarter cigarette shipment declines of 12% to 14%, a rate likely greater than the ongoing impact of the tax increase due to trade, inventory de-stocking during the quarter, but still expected to be a significant negative ongoing impact to demand for our products.

In the rest of the world, the major international cigarette companies and various tobacco trade organizations are not yet reporting significant brand down trading or volume losses so far this year beyond normal levels in reaction to the global economic recession. However, we believe that as economic recession continues, cigarette consumption will be negatively impacted due to decreased personal income and tax increases.

We continue to monitor our global volume trends closely and are concerned about the likely declines and the impact decreased demand could have on utilization of our assets and selling prices.

I will now cover key developments in our business and the outlook for the balance of 2009. We continue to maintain our leadership position in low-ignition propensity, or LIP technology, and are advancing plans to expand our capacity outside of North America to meet demand as other markets move toward implementing LIP regulation.

Our US segment results highlight the increasing value of our LIP franchise to Schweitzer-Mauduit and the long-term growth potential this development provides as demand spreads beyond North America. As demand for LIP expands, so does our production efficiencies and cost (inaudible) for this new technology.

In addition to our leadership and product performance and design, we expect to use improved cost performance in part to head off any emerging competitive threats for lower product pricing, while sustaining the improved profitability of LIP versus conventional cigarette paper. Currently Australia, the entire European Union, Finland, South Africa, and South Korea have taken action toward implementing LIP regulation. We expect demand for LIP outside of North America to begin by late 2009, commencing with Australia and Finland, with the EU likely to require compliance by 2012.

We have begun implementing our first LIP capacity plants in Europe and continue to work with customers to finalize product development and supply agreements.

The value of our reconstituted tobacco leaf franchise, or RTL, continues to grow. We are now in the planning stages for establishing additional capacity outside of our current sole French location to meet growing worldwide demand. Progress has been made gaining government approval for RTL joint venture in China and we expect to reach an agreement and begin construction of this Greenfield site later this year.

Now a word on our restructuring program. We realize benefits during the first quarter on the significant restructuring activities undertaken during the last several years. Losses from product source from the former Lee, Massachusetts location were replaced by profitable sourcing of several of these products from our Brazilian mill.

We made progress during the quarter improving operations of the rebuilt paper machine at our Papeteries de Mauduit, or PdM mill in France, which now only operates four cost-effective paper machines, following the shutdown of all small machines over the last several years.

As we announced on April 20, the restructuring actions for Malaucene finish tipping facility were, unfortunately, not enough to allow this business to return to acceptable levels of financial performance. As a result, we have begun the process to close the site. Pete will cover the expected financial impact of this decision.

With the eventual closure of the Malaucene facility, Schweitzer-Mauduit will have a number one or two market position in all of our core tobacco-related product segments. We have or are in the process of shutting down a significant amount of higher cost and (inaudible) paper capacity across the corporation. As a result, our exposure to industry volume declines is lessened. Nonetheless, we continue to evaluate how to best operate our facilities to meet available demand and likely will announce further restructuring actions during 2009.

As the first quarter results demonstrate, however, we are now in position to generate higher earnings despite continued restructuring activity due to the strengthening of our product mix and transformation of our manufacturing platform achieved over the last several years.

The currency situation in Brazil has become more favorable. We have extended for 2010 [foreign exchange] contract to lock in these favorable rates for approximately half of our US dollar transaction exposure in Brazil. Along with selling price increases and the transfer of base tipping paper production from the US, we expect substantially improved operating profit in 2009 and are very pleased with the turnaround at this facility.

Our 50% joint venture paper mill in China, China Tobacco Mauduit, or CTM, is experiencing slower than expected customer qualification and acceptance. Sales volumes and new customer orders for cigarette paper are now growing and we expect these to continue throughout 2009 as we work to set up the mill. Weeks back CTM to incur a loss for the full year 2009, but still believe it will be a success in the long term.

We have taken advantage of the continuing weakness in credit markets and have placed interest rate edges into 2012, covering a 20% to 40% of our current debt outstanding at fixed rates averaging below 2%. We continue to focus on reducing net debt and conserving cash. We made good progress during the first quarter, despite working [capital] increases and substantial US pension funding requirements caused by the poor equity market performance.

In summary, we expect earnings will improve during 2009 and range between $1.80 to $2 per share, excluding the restructuring expenses but including the projected $0.30 per share increase in losses for the rest of 2009 at the Malaucene facility. These [fragile results is prudent] in relation to our strong first quarter results and reflects the uncertainties in our business given the global economic situation. As the year progresses, we will update our earnings guidance reflecting actual results achieved and the clarity the said passage of time should bring to the worldwide volume outlook and its impact on our operations.

Our short-term focus is to execute on our various initiatives and day-to-day operations, especially cost reduction activities to sustain our improved performance levels. The key challenge to our business is poor worldwide economy conditions which, as noted earlier, will likely cause increases in cigarette taxation and could lower levels of disposable income among smokers, especially in developing countries, thus negatively impacting demand. We continue to evaluate how to best size and operate our base paper operation to match changes in market needs. Long-term, we remain bullish about Schweitzer-Mauduit's Prospect to grow shareholder value by continuing to expand our high-value products while transforming our base paper operations.

Our excellent first-quarter results demonstrate a potential of this strategy. I will now turn to Pete to cover highlights of our financial performance.

Thank you, Frederic. Net sales for the first quarter of 2009 decreased versus the prior year quarter by 3%. The decline is mostly due to the weakening of the euro compared to the US dollar in the first quarter 2009 compared to 2008, and also to lower sales volumes. Both items were partially offset by the favorable benefit of higher overall selling prices.

For the first quarter 2009 compared to the prior year quarter, sales volumes declined 11%, with net 6% decline in tobacco-related papers due to our decision to shift production of certain papers to our China joint venture, closure of the Lee Mills, and are exiting the coated paper's business in Brazil. Sales volumes of cigarette paper for lower-ignition propensity cigarettes increased during the first quarter of 2009. We incurred modest restructuring and impairment expenses of $300,000 in the first quarter of 2009, compared with $2 million in the prior year quarter in connection with the restructuring activities initiated during 2006, '07, and '08.

On April 20, 2009, we announced plans to close our finished tipping paper production facility in Malaucene, France. As a result, we plan to reduce employment by 210 people. Although union negotiations are ongoing, we anticipate new restructuring expenses of $22 million, including $20 million in cash severance payments and $2 million of non-cash charges. These expenses will begin in the second quarter of 2009 through the plan's completion, which is expected by the end of 2009.

Additionally, we expect operating losses to increase at the Malaucene facility for the balance of 2009 by approximately $7 million pretax, or $0.30 per share. Operating profit, excluding restructuring expenses, was $23.1 million for the first quarter 2009, compared with $2 million for the first quarter of 2008. Excluding restructuring expenses, the increase in operating profit was attributable to $17.6 million from higher average selling prices and product mix, $2.4 million from lower inflationary costs, especially wood pulp, and $4.5 million from the benefits of cost savings programs.

These increases were partially offset by $1.9 million from lower sales volumes and $2.7 million in higher general and administrative costs. The average per ton list price in the United States of northern bleached softwood kraft declined by 23% to $675 in the first quarter of 2009, compared to $880 in the first quarter of 2008.

The loss from our 50% joint paper mill in China was $1.3 million during the first quarter 2009, compared to income of $400,000 in the first quarter of 2008. The joint venture generated a slight gross profit for the quarter, but a net loss was generated due to low sales volume. We expect a full-year 2009 loss from the joint venture, however, we're still confident of the long-term success of this project.

Net debt decreased 5.6% to $158.4 million at quarter end, compared to the year-end 2008. Our debt-to-capital ratio at quarter end was 36.5% versus 39.3% at year end 2008. We had approximately $91 million of contractual availability on our credit and overdraft facilities at March 31, 2009, and our net debt to adjusted EBITDA ratio improved to 1.58 versus a limit of 3.0, due to both lower net debt and substantially increase EBITDA generation.

First quarter 2009 capital spending was a low $2.6 million, reflecting the lack of strategic investments and our continued focus on minimizing investment. Operating cash flow increased to $11.8 million for 2009, versus a use of cash of $8 million in the first quarter of 2008. Investment and working capital totaled $15.5 million during the quarter, primarily due to a change in French law, limiting vendor payment terms, as well as seasonal impacts on both accounts receivable and payable.

During the first quarter 2009, we reduced outstanding debt by $13.5 million and made $6 million in contributions to our pension plans. Capital spending for 2009 is currently expected to be at the low end of a range between $20 and $30 million. The reorganization of legal entities completed at the end of 2008 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 $20 to $30 million. Net debt is projected to remain in the range of $155 to $165 million during the second quarter of 2009.

Schweitzer-Mauduit announced a second quarterly common -- announced a quarterly common stock dividend of $0.15 per share payable on June 29, 2009 to stockholders of record on May 26, 2009.

That concludes our planned comment. Andrew, please open the phone line for questions.

(Operator instructions) Your first question, sir, comes from the line of Ann Gurkin from Davenport. Go ahead.

Morning.

Good morning, Ann.

Wonder if I could start with a greater discussion on RTL's volume in the quarter. What was volume in the quarter and what are your expectations for RTL volume for the full year?

Good morning, Ann.

Good morning.

This is Frederic. I would say, we continue to see some growth in our RTL business and we expect to continue to see strong quarters coming out of RTL for the balance of the year.

Do you think that volume could be up mid-single digits for the full year for RTL?

I would say at this stage it's within the range of possibility.

Okay. Switching to LIP, I appreciate the update in the 10-Q. I was wondering if I could just get an update from you all regarding competitive activity or products, particularly on the international front, in the LIP arena versus your product.

Well, we continue to see a lot of activity on the competitive products in the qualification stage. However, there has been no visible technology going to the commercial stage. So as I communicated before, we remain very vigilant and very focused on improving the valuable position of our own technologies in the expectation that when the legislation goes to Europe, we may see some activity from competitive technologies.

Okay.

But so far, no change.

Okay. And your guidance for the year, does that include additional business losses due to restructuring plans that have not been announced publicly?

I would say our guidance as mentioned is [prudent] and it's based on where we will see volume declines and some pressure on pricing due to the side effects of the economy and also excise tax increases that have been already announced in the US but also in several countries in Europe. So it is based more on softening of demand than anything else.

But since the February call, is it fair to say that you all have incorporated a softer outlook for global demand for cigarettes --

Right.

-- in this earnings release? Yes. Okay. And then last, the business you're exiting in France, the tipping business, was this a profitable business? And is this part of your strategy to exit kind of lower margin businesses and improve the mix of Schweitzer's overall portfolio going forward?

Yes, the finish tipping business has been struggling and underperforming for several years. We communicated cumulative losses beyond $20 million over the last four plus years. And you're absolutely correct, the decision to divest the Malaucene site is in line with our strategy to refocus our portfolio businesses in the sectors and regions where we can win. In the case of finished tipping, only wasn't it performing, but we also had a very small market share, less than 5%, and not in a position to provide any leverage to the industry.

All right. Thank you. That's great.

(Operator instructions) And, sir, at this time, we have no more questions.

All right, Andrew, thank you very much. Goodbye.

This concludes today's presentation. You may now disconnect your lines.