Neptune Insurance Holdings Inc (NP) 2009 Q1 法說會逐字稿

I would like to remind everyone that the presentation today contains statements that are forward looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management's beliefs and assumptions regarding future events based on currently available information. Listeners are therefore cautioned not to put undue reliance on forward looking statements as they are not a guarantee of future performance and remain subject to a number of uncertainties and other factors that could cause actual results to differ materially from forecasts. A more detailed description of these uncertainties and risk factors is provided in Neenah Paper's earnings release and filings with the Securities and Exchange Commission which you are encouraged to review. Except to the extent required by applicable security laws Neenah Paper undertakes no obligation to update or publicly revise any of the forward looking statements you may hear today. In addition, the company may make certain statements during the course of this presentation that includes references to non-GAAP financial measures as defined by SEC regulation. As required by those regulations if that were to happen a reconciliation of these measures to what management believes are the most directly comparable GAAP measures will be posted on the company's website at www. neenah.com.

Good morning, my name is Felicia and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter 2009 Neenah Paper, Inc. earnings call. (Operator Instructions)

At this time I would like to turn the call over to Mr. Bill McCarthy VP of Financial Analysis and Investor Relations. Thank you. Mr. McCarthy you may begin.

Okay. Thank you. Good morning and welcome to Neenah Paper's conference call discussing 2009 first quarter earnings. With me today are Sean Erwin, our Chief Executive Officer and Bonnie Lind our Chief Financial Officer. I will recap consolidated results and Sean and Bonnie will discuss financial performance and our businesses in detail. Net sales for the first quarter were $134 million, down from $147 million in the fourth quarter and below $206 million reported in the first quarter of 2008. Sales in each of our business segments continued to reflect weak market and economic conditions exacerbated by inventory de stocking throughout the supply chain.

Operating earnings of $5 million while down from $18 million a year ago increased almost $15 million from the fourth quarter as we realized benefits from actions taken to cut costs as well as from lower input prices. In the first quarter we reported a loss from continuing operations of about $700,000 or $0.05 per share. This compared with earnings of $8.5 million or $0.57 per share last year. Income from discontinued operations was $100,000 this quarter and compared to a loss of $81 million last year. The 2008 loss resulted primarily from non-cash charges from the impairment and anticipated loss on the sale of the Pictou pulp mill. Let me now turn things over to Sean.

Thank you, Bill, and good morning everyone. I 'll talk about about current business conditions and some of the actions we've taken before turning things over to Bonnie to cover financial results. First, let me say I'm very pleased with what our teams have achieved during the past two quarters despite very challenging market conditions. This was possible due to a variety of initiatives. First, we closely controlled operating schedules and purchasing activities in line with demand and also carefully managed our receivables in credit. Consequently we have freed up more than $10 million of cash from working capital this quarter in addition to the $11 million tax refund we received.

Second, we are controlling spending throughout our businesses. SG&A costs were reduced almost $5 million versus last year's. We have instituted a company wide salary freeze and the head count is down around 12% from a year ago. We have cut discretionary spending at our mills and have an ongoing program to track all of our initiatives to ensure we are meeting or exceeding our objectives. We expect these programs to deliver more than $10 million of year on year savings in addition to the savings from the Rippen shutdown. Finally, we said we would reduce capital spending this year. In the first quarter we spent $3 million and for the full year we now expect spending to be around $10 million, less than the $15 million we previously mentioned but still adequate to meet the maintenance and other needs this year. As a result of all these actions, we generated free cash flow of $26 million in the quarter that was used to pay down debt.

Let me next turn to our businesses. In fine paper, demand for uncoated presheet papers continues to be very weak while the overall uncoated presheet market was reported to be down 16%, most major producers reported percentage volume declines in the low to mid-20s reflecting the additional impact of inventory destocking that has occurred. The premium text and cover segment was under further pressure as end use printing markets including financial, automotive and real estate had been particularly hard hit in the economic downturn. While we continue to invest in our brands in our enhanced supply chain capabilities as well as pursue growth in niches such as digital, beverage labels and environmentally preferred papers, capacity in the market continues to consolidate, which is good and the third largest competitor in the market recently announced a shut down of their text and cover manufacturing.

We remain the leader in the segment and will benefit from this consolidation. In addition, our team in fine paper has taken some hard decisions. We remain committed to balancing our capacity with demand to ensure a cost competitive platform. As you have probably read on Friday we announced the permanent closure of our mill in Rippen, California. The single machine mill with annual capacity of around 35,000 tons had been operating at a reduced schedule and as a result was our highest cost facility. Closing the mill will allow us to schedule our remaining mills more efficiently and generate savings of over $7 million per year to reduce spending and manufacturing and distribution efficiencies. Production will cease by the end of this month and we will start to realize savings immediately. Transition costs will be minimal as most of the Rippen grades are already being produced at our other facilities. There will be one time cash costs of approximately $11 million related to the closure of which $7 million will be paid this year. This includes costs related to the termination of a contract for a third party co-generation facility. We are actively marketing the facility and property located in northern California and believe that proceeds from a sale should more than off set these one time costs.

Turning to technical products, sales also reflected a sharp slow down in the end use demand as well as inventory destocking. Most of our markets are industrial applications including autos and housing and sales and some of our large product categories such as filtration, tape and abrasives reflected weaknesses in these markets. Based on our customer's production schedules and transportation lead time, we receive more advance notice of demand in technical products than for fine paper. The information suggests that things may be firming up a bit though we are still far from a normal level. We have carefully managed working capital and costs in technical products and profits improved versus the fourth quarter. Our teams in the US and Germany have managed downtime to minimize costs and head count.

We are continuing to generate cash and investing in new products in R&D that will allow us to sustain our competitive position and benefit when our markets recover. In summary, since we can't accurately predict when volumes will recover, we are taking a number of actions which have improved our cost position already and will yield additional benefits as the year progresses. Next, I will turn things over to Bonnie to talk about the financial results in detail.

Thank you, Sean. This morning I'll lead off with a few general comments and then go into some detail on segment results and corporate costs. In our March call we said we would work this year to off set the impact of economy driven lower volumes with cost reductions and other actions to manage cash flow. I am pleased with the $15 million increase in operating earnings we delivered this quarter versus the prior quarter and with our strong cash flow. Despite lower volumes earnings increased in each of our segments as we started to see the benefit of our actions and lower input prices. In fact, input prices dropped fairly significantly versus the fourth quarter for commodity pulp, certain latexes and other energy and raw material costs; however, on a year on year basis the benefit was not as great as many of these items had a steep run up in cost in the second half of 2008. It appears we may be reaching the bottom in commodity input pricing with second quarter costs on average slightly more favorable than the first quarter.

Moving next to the segment results. Fine paper net sales were $65 million versus $72 million in the fourth quarter and down significantly from a very strong first quarter of $97 million last year. Now as Sean mentioned, the market for printing text and cover papers is experienced a steep decline in this economic downturn which intensified in November of last year. However, consolidation and rationalization in the market has helped to provide support for selling prices and our sales mix was pretty strong in the first quarter with a higher percentage of shipments represented by stocking item that continue to demonstrate our brand strength. Operating income was $9 million up from $1 million in the fourth quarter and close to the year ago level of $10 million. Lower input prices reductions in spending and improved selling price and mix helped drive results versus the first quarter and largely off set the impact of lower volumes and reduced mill schedules versus the prior year. Operating margins also increased versus both last quarter and last year and were 13% in the quarter.

Now I mentioned in our last call that we indefinitely shutdown one of our paper machines in our Neenah mill in March and last Friday we announced the permanent shut down of the Rippen mill. Production at Rippen will cease this month. These changes to our asset footprint provide a lower cost manufacturing platform with adequate capacity to support growth opportunities. We expect to book a one time closure charge of $17 million in the second quarter of which $11 million is cash that will be paid over the next two years. With annual cash savings of over $7 million, mostly due to elimination of mill fixed costs this action pays for itself in less than two years and that excludes additional cash proceeds from the sale of the mill.

As Sean mentioned these proceeds are expected to more than cover our one time cash cost. Moving to technical products quarterly net sales were $69 million compared with $109 million in the first quarter of 2008 and $74 million last quarter versus year ago levels approximately $7 million of a decline was due to currency translation as a result of a weaker Euro in 2009. Most of our products are used in industrial applications so volumes reflect the impact of the economic slow down as well as inventory destocking throughout the supply chain. In filtration our largest product line our competitive position remains strong and sales were stable versus the fourth quarter. Most of the decline versus the fourth quarter occurred in tape due to reduced orders by auto and aerospace customers and lower exports of saturated tape sources from the US as a result of weaker demand and a stronger US dollar.

There were bright spots as well with medical packaging having its strongest quarter in the past five years. Our European nonwoven wall covering business was also up quarter on quarter following actions taken last year to improve both our products and our competitive position. Technical products generated a pretax operating loss of $600,000, significantly improved from an adjusted loss of $6 million in the fourth quarter but down from $8 million in the first quarter of 2008. Like fine paper cost cutting lower input prices increased profit levels versus the fourth quarter. Lower volumes and related mill downtime resulted in a $12 million reduction in profit versus last year about $4 million of which was off set by cost reductions and improved selling prices. Programs under way to further streamline our cost position should improve this going forward.

While we benefited from a drop in input prices versus the fourth quarter these costs were only slightly favorable versus prior year as lower commodity pulp prices were mostly off set by higher energy costs. Our annual contracts for energy in the US and Germany will reflect lower prices beginning in the fourth quarter. Unallocated corporate and other expenses $3.1 million in the quarter versus $0.2 million in 2008. 2008 included a $4 million non-cash gain related to the settlement of benefits for Terrace Bay retirees, so 2009 spending levels reflect a significant decrease versus last year. In fact, across all of our businesses SG&A in total is down almost 20% from an average of $19 million per quarter in 2008 to $16 million in the first quarter.

Next I will review some financial items. Pension and other post retirement benefit valuations have now been finalized by our actuaries and pension expense will increase this year by $2 million as a result of lower plan returns in 2008. On the funding side we now expect cash funding to be around $9 million, fairly close to last year's level and down from the $11 million that I had communicated previously. Capital spending was $3 million in the quarter versus $7 million last year and Sean mentioned we now expect full year spending of around $10 million. Depreciation and amortization expense including stock based compensation will be in the range of 35 to $40 million. Our effective tax rate in the quarter was approximately 18%. We received the $11 million tax refund I mentioned in our last call and continue to have a significant amount of available tax losses that can be applied against future US income. Consequently we do not expect to pay any US federal taxes in the next few years. Our liquidity position continues to improve due to our strong cash generation which we have used to pay down debt.

At the end of March our debt was $341 million, down from $365 million at year end. The interest rate on our US revolver borrowings was 2.5% for the quarter and consolidated interest expense was $5.7 million, down from $6.2 million last year as a result of lower rate and reduced debt levels. Available borrowing capacity on our credit facility increased from year end despite lower working capital levels and is now more than $60 million. Finally as reminder we have no major refinancing requirements in the near term.

To recap in the first quarter we began to see benefits from our cost reduction initiatives as well as lower input prices. Despite the tough environment our business are generating significant cash flows that have allowed us to pay down debt. Wile the second quarter will include payments for our semi annual bond interest and close to $5 million associated with the Rippen closure we continue to have sufficient liquidity and cash generation capabilities to meet these needs and the actions we have taken to improve our cost position will provide additional savings as the year progresses. I will now turn things back to you, Sean.

Thanks Bonnie. Let me wrap up with a few comments. As usual let me start off on safety, our mills have reduced our reportable incident rate from 1.8 last year to 0.8 through April. Safety performance was well above industry standards and our current level represents world class performance. The safety of our employees remains a top priority and it is great to see the accomplishments our teams are achieving in this area. We came into 2009 knowing it would be a challenging year and we would have to be prepared to implement significant change. Sales in the first quarter were slightly below the fourth quarter yet our EBIT improved $15 million.

As Bonnie highlighted we not only benefited from lower input costs in the quarter but from the significant steps our operations and business teams have taken to reduce our cost structures and operate efficiently with the reduced volume loads, while continuing to improve the mix of products sold. Although we are seeing some improvements in our order book and backlogs the timing and strength of our recovery remains uncertain. Our teams on a mill business and corporate level have and will continue to implement changes necessary to generate profitable results even at currently reduced volume levels. Many of these actions including the recent announcement to close the Rippen, California mill and the restructuring taking place at our other sites are difficult but necessary in the present economic environment.

Late last year because of the downturns and uncertainties we saw in the markets we committed to reduce cash spending in 2009 by $25 million through a combination of operating and capital expenditures. As I hope you can see our teams are delivering on that commitment. We have taken the steps necessary to conserve cash, pay down debt and maintain our liquidity in today's markets. All of our businesses improved their performance in the first quarter and generated strong cash flow.

Fine paper expanded their margins at the same time. The actions we are taking here and in Germany including employment reductions spending cuts and capacity rationalization, will further improve our cost position for the remainder of the year. No one asked for this market but our teams are showing they are adapted operating in them. We remain equally committed to strategies and plans which will generate long-term value.

The initiatives and development efforts under way both internally and with customers continue and in many cases have intensified. For instance, while the European auto industry continues to take significant downtime in the short-term their commitment to new engine platforms with higher fuel efficiencies and emission standards has not waivered and our development efforts have intensified to ensure we remain the innovation leader as the markets recover. In fine paper using capabilities now available with our ARP systems, we have further intensified our supply chain initiatives which provide information and opportunities for our customers to increase both their working capital efficiency and profitability while supporting our objective to gain share in this market. We believe our competitive position and leadership in our markets is intact.

We have improved our cost position and margin. We are generating cash flow and have ample liquidity. In addition, we are actively continuing efforts to unlock value from the sale of our timber lands in Nova Scotia. Our teams are committed to driving value and we appreciate your interest and investment in Neenah Paper. I would now like to open up the call to any questions you might have.

Your first question comes from the line of Mark Weintraub of Buckingham research.

Good morning, Mark

Good morning, Sean. Could you provide a little more detail on the fixed price contracts or the impact that you think would accrue to you starting in the fourth quarter when those energy contracts roll over if prices were to stay where they are today?

Yes. There's really two components of that, Mark. One. Speaking first in the US, we use coal in our mill in the upper peninsula in Michigan. Comes in on barges. As you can imagine, there aren't a lot of barge deliveries during the winter and early spring there. We tend to take deliveries in the summer months.

The price of coal as you know, has dropped dramatically. We will begin to experience those benefits based on new contracts probably end of the third quarter and predominantly in the fourth quarter. In Germany, the gas contracts -- it is mainly a natural gas issue over there -- the contracts that were worked on last year, as you know the prices have spiked. Those contracts come off the end of September this year and we should probably see -- I would guess -- a million -- close to a million Euro improvement in the fourth quarter of this year. Just gas contracts.

Is that an annualized rate or is that just in the quarter?

That's just in the quarter.

Is it fair to say there is basically a [4 million] annualized type of impact?

Yeah.

I assume the order of magnitude on the coal is fair but smaller , would that be

It is a fraction of that.

So maybe $5 million if we put the two together annualized, is that a reasonable estimate?

That sounds like a pretty reasonable number.

Then you also talked about programs to further streamline in technical specialties. Could you provide a little more color and the magnitude from those efforts?

I was actually in Germany last week. They are continuing to work with their works counsel. They have taken downtime-- significant downtime in the mills. As compared to December, if you recall, where the downtime is very expensive, we are now involved in the government program. Their short time work program where they will subsidize the cost of the labor and benefits cost during the downtime, so the cost of the downtime has gone down.

At the same time we are looking at permanent reductions, short-term contract employees have for the most part left the company. We are letting employees on longer term contracts go if those contracts go as those contracts come up for renewal and third we are working with the works council at the various mills to take more permanent reductions, first on a voluntary basis and if we don't get enough, more on an involuntary basis.

When you think about the technical specialties business longer term, what type of margins do you -- are you targeting, do you think are realistic? And what are going to be the drivers that will get you there? I realize it is a pretty big question for this format --

If you recall last year before this hit at the end of this year, we were very pleased with what was happening first in the US business where even though volumes were down, margins were improving nicely due to a change in the product mix of the business. That is continuing. We are seeing good mix in terms of our business.

In total we are seeing obviously volumes declining and in many cases we have a much closer relationship with the end users in that business than we do in fine paper where it goes through a merchant distribution.. These mills, in many cases, have taken significant downtime and are working through the inventory. We targeted last year long-term-- not short-term, long-term we said we wanted EBIT margins in the mid teens. That is still a long-term realistic goal for this business.

I will circle back with more questions if there is time.

Okay. Thank you.

Your next question comes from the line of [James Kitchel with Goldman Sachs.]

Good morning. Just a few quick questions. First, I was wondering if you guys could give any kind of an update on the sale of your timberland's where you are in the process and how that is going given the environment?

Sure. We began on that really in earnest on the second half of last year after the mill sale was completed, because it is hard to tie one down without the other locked in and now we have the fiber supply agreement. We are very active in the process right now. Looking at multiple approaches including ones we have used in the past. Couple of hiccups late in the year with the change in the credit markets, slowed a couple of interested parties down but we are extremely active in it now. As we said in the Q which was filed yesterday, we fully expect that be completed this year.

Okay, I guess one other question, the impact of the downtime in the technical products business, it seems pretty substantial in the quarter. It sounded like a lot of it was related to inventory destocking and maybe now you are getting some benefits from government subsidies. I was curious if you could offer up any kind of an outlook for the amount of downtime you're taking in business now or how much you think you're likely to be taking the second quarter versus the first?

I think the amount of the downtime is going to obviously slow down as the year moves along. In the first quarter we took downtime both in the US where production in the first quarter from the prior year was down 35%. Up slightly from the fourth quarter, we would expect to take some downtime later in the quarter in the US. In technical products I think what we will do though is a much more efficient way of doing it this year, we may extend our summer shutdown, the annual shutdown rather than bringing a mill up and down.

In Germany we are taking downtime but it is really by machine. In some of the mills we are running our most efficient paper machines and saturaters almost in full capacity. We will shut individual machines down. In total in the first quarter, it is about a 20% reduction in production versus the prior year.

Okay. That's very helpful. I guess the last question was to sort of get an update on how you are thinking about the dividend payment this time. If you think it's sustainable? Is it something you are actively talking about or discussing? That's it, so thank you very much.

I think I said in the March call when asked that question when the yield was actually much higher on the dividend,that there are a lot of things that I'd prefer to cut in this company before I stop a dividend that I think is a reasonable return based on what we think is a reasonable share price. So in our long-term forecast and cash management, I'm keeping the dividend in there. Obviously it is something that is always subject to change but at this point in time we have no plans to.

Okay. Thank you for the update.

You are welcome.

Your next question comes from the line of David Taylor of David P Taylor and company.

Hi David!

How are you?

Pretty good.

Could you flesh out your comments on product pricing. You talked a lot about input costs. How have your prices held up in this miserable economic period?

Well, very well. I think in both business units we have held up well. In the case of technical products US, I think as we mentioned on the last call, some of the price increases didn't kick in until January because we were tied to some contracts that limited the number of increases that we could take when raw materials ran up last year.

We didn't raise prices a number of times in fine paper last year. We took a price increase later in the year and that price is holding. Our mix is good in fine paper. We are selling a higher percentage of stocking branded products and where prices tend to be very sticky and one of the areas where our business has declined year on year at a higher percentage basis is the little bit that we did do more in the commodity end where prices have suffered, we have lost more volume there than in the branded business.

I'm looking at the press release that came out yesterday and on the balance sheet you have December 31 and March 31. Looking year to year, rather than sequential quarters, could you talk about number of days inventory and number of days of receivables and what is happening in terms of working capital management?

Yeah, our receivables obviously have come down due to the reduction in sales. What is interesting is our day sales outstanding in receivables have improved Q1 to Q1 dramatically. I would be a liar if I didn't say some of our business team leaders have learned more about credit management in the last probably two quarters than they had in their career, but we have a great group of high quality customers. We have worked very closely with them as you can imagine.

Various firms in different regions of the world have had issues. We have worked very carefully to support our customers while at the same time not taking undue risk. What we are finding, David, is we are having very frank conversations with customers and where they present us with issues, we are working with them. We are working through them. The quality of our receivables have improved and we have helped some customers through some tough situations they have experienced which I think will benefit us in the long run.

How do you feel inventory versus current or short-term projected volumes?

We have taken it down quite a bit and so our working capital in total as a percentage of sales is not getting out of line. We look at working capital -- we would expect to increase as the year moves along from a cash flow standpoint though, our availability under the ABLs will then also increase. In no way have we created a credit trap for ourselves by taking down working capital, just the opposite. I think it is a very prudent thing to do.

We have not built up obsolete inventories. We are -- I have been around long enough to know when times are tough you can improve results by building up working capital. The challenge that our teams were given late last year was to do just the opposite and they have done a great job of it.

I don't know what your policy is about talking about your debt covenants. Some companies talk about it. Some don't.

What we have said in the past is our agreements are very covenant light and we are in fine shape. We do our cash forecasting on a detailed basis. We are in good shape on our bonds.

We only have two different types of covenants, one in current in the bonds and one in availability and we are in very comfortable position on both.

Our availability as Bonnie mentioned actually increased even with taking down working capital and receivables coming down our availability improved over the prior quarter so we are in great shape.

Can you discuss or will you discuss what covenants -- I know you don't want to be precise about it --

Sure. On our ABL it is actually very simple. We have got very good debt instruments out there and our ABL, the first covenant we have would be on dividends --

Those are triggers. As far as the covenant on our ABL we have a fixed charge coverage ratio that we don't calculate unless availability drops below $25 million and so that's a pretty standard --

We ended the quarter above 60.

That's a present standard calculation. On our bonds it is your standard consolidated interest coverage. That's the one that's an incurrence test. That one would mean we would have to be better than 2 to 1 if we were to incur more debt.

Two to one of what to what?

Your consolidated interest coverage is your EBITDA divided by your interest.

If we were to incur more debt.

Okay. Can you cite where you were at the end of the last quarter?

We were above 2 to 1.

Okay. Very good. Appreciate the info.

Your final question comes from the line of Mark Weintraub of Buckingham research.

Thanks. Sean, you mentioned that the Rippen could be about $7 million in cost benefit. You mentioned you're taking costs out also streamlining in-- in Germany. You indicated input costs should be somewhat favorable in the second quarter and presumably in the fourth quarter you get another significant help on the energy side as those contracts roll over. You have taken your working capital down quite a bit. Those would all point to improving performance as the year progressed. What would be on the other side of the ledger that might prevent profitability from improving as the year progressed?

That's a good question. You know we are living with low volumes now. We are seeing firming in the order books. I don't see -- I don't see volumes getting worse. I'm also smart enough to know that what we have all seen in the last nine months never say never.

We will take our summer downs in some of the mills and it is more so in technical products and fine paper. I don't see -- in Bonnie's comments, Mark, I think she used the phrase that the commodity prices seem to be bottoming out. With the number of shutdowns in pulp mills across -- especially across Canada -- I don't see input costs spiking any time this year but a lot of strange things have happened over the past year. There could be an input cost surprise that we are not factoring in our forecast.

Would it be fair to say that the other side of the ledger would largely be things you wouldn't be expecting at this point, could happen but not what you would be expecting?

Yes.

Thank you.

Fair way to put it.

Now I will turn the call back over to Mr. Sean Erwin.

As usual, I appreciate your participation in this and thank you for your continued support of Neenah Paper. Thank you

And this concludes today's conference you may now disconnect at this time.