Neptune Insurance Holdings Inc (NP) 2009 Q2 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 forecast.

A more detailed description of these uncertainties and risk factors is provided in Neenah Paper's earnings release and filed with the Securities and Exchange Commission which you are encouraged to review. Except to the extent required by applicable securities laws, Neenah Paper undertakes no obligation to update or publicly revise any of the forward-looking statements that you may hear today.

In addition, the company may make certain statements during the course of this presentation that include references to non-GAAP financial measures as defined by the SEC regulations. 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 would be posted on the company's website at www.Neenah.com.

Good morning. My name is Casey and I will be your conference operator today. At this time I would like to welcome everyone to the second quarter 2009 Neenah Paper, Inc. 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.

I would now like to turn today's call over to Mr. Bill McCarthy, Vice President of Financial Analysis and Investor Relations. Sir, you may begin.

Thank you. Good morning and welcome to Neenah Paper's conference call on second-quarter results. With me today are Sean Erwin, our Chief Executive Officer, and Bonnie Lind, our Chief Financial Officer. Our earnings were released yesterday afternoon and our 10-Q has been filed as well.

I will recap a few figures before turning things over to Sean and Bonnie to review financial performance and business results in detail. As usual, we will take time to answer questions after our remarks.

We will be referring to non-GAAP adjusted income this morning. Adjustments were made to exclude $18 million of pretax charges in the current period related to the make closure of our mill in Ripon, California and to exclude a pretax gain of approximately $3 million in the prior year related to the sale of our Urbana, Ohio plant. Both of these only impacted fine paper.

On a per share basis, these adjustments were $0.79 for Ripon closure costs and $0.12 for the Urbana sale gain. After excluding these items, earnings per share for continuing operations in the second quarter was $0.21, up significantly from a loss of $0.05 per share in the first quarter though still below prior-year adjusted earnings of $0.30 per share.

Discontinued operations includes our timberlands operation in 2009 and both the timberlands and results from our pulp mill in Pictou, Nova Scotia in 2008. In the second quarter of 2009 there was a loss of $100,000 as income from timberland sales were more than offset by the increased tax expense and other items. The second quarter also reflected seasonally low harvesting levels as well as ongoing impacts of a weak lumber market.

In 2008 the loss from discontinued operations was $31 million, comprised of a $4 million loss on pulp operations and a $27 million non-cash charge to recognize deferred pension expense when the Pictou mill was sold in June 2008.

Let me now turn things over to Sean Erwin, our Chief Executive Officer. Sean?

Thank you, Bill, and good morning everyone. Let me start by saying we are very pleased with the continued progress of our teams in reducing costs and delivering cash flow.

Our key financial priorities this year were to deliver positive cash flow despite depressed market and economic conditions, reduce operating and G&A costs in line with anticipated volume decline and pay down debt with available cash flows. As reflected in the results released last night, our teams are delivering on these commitments.

While our topline continues to reflect the weak market conditions, operating income and profit margins improved again this quarter. Adjusted operating income was almost $8 million, up from $5 million in the first quarter. And gross profit margins improved over 18% in the quarter from just under 16% in the first quarter and 15% last year.

We are benefiting from lower raw material prices, but reduced mill operating schedules negatively affect costs. It is the actions our teams have taken to improve operating performance and reduce costs that have had a decisive impact on our results.

At the same time, we remain committed to our development efforts with customers and to bringing supply chain innovation to the Fine Paper segment and are benefiting from our actions in these areas. In Fine Paper, we continue to invest in our brands and in finding innovative ways to support graphic designers and printers.

To that end, last quarter we launched an industry-first iPhone application that enables designers to merge color technology and paper to meet their creative needs in a mobile environment.

We are utilizing technology and innovation to drive real improvements in our supply chain as well. Unique service guarantees and proprietary market base inventory tools that we recently brought to the market have created significant excitement and improved activity with our merchant customers. In our technical products business, while making necessary headcount and other cost reductions, we maintained our focus and spending on innovation. This supported the introduction of new products in filtration, tape and veneer backers, key transfer and book covers.

We also continued to innovate and our existing portfolio products for where our R&D and operations teams, along with our suppliers and customers, work together to utilize lower cost fibers and improve the performance of key latexes and synthetic fibers. Overall, we are continuing to build a pipeline of new products to unlock opportunities for growth and hasten our recovery in volume.

Throughout the company, our teams have been focused on managing spending and reducing costs. We have developed specific programs implemented this year that have included headcount and benefit reduction, vendor renegotiations, salary freezes and cutbacks in spending. These programs have delivered over $10 million in savings so far this year, a run rate well ahead of the annual savings targeted at $10 million that I communicated earlier this year. Not included in this are the additional savings that will result from the recent Ripon mill closure.

Closing the mill was a difficult decision, but was executed well and quickly. Almost immediately following the May shutdown, our Fine Paper business began to see benefits of the consolidation and the elimination of $7 million in annual costs. We are already actively marketing the site for sale and expect proceeds will more than cover cash costs closure.

Improved operating results along with the closely managed capital spending and working capital allowed us to generate free cash flow of almost $5 million in the quarter. We're pleased with this, especially since operating cash flow included restructuring payments of $6 million and an $8 million semiannual bond interest payment. With our free cash flow, we were able to reduce debt for the third consecutive quarter and year-to-date net debt is down almost $30 million.

So, overall, we are doing what we said we would in a tough market environment. We have stayed focused on cost reductions and cash generation across all businesses, but have not lost sight that it is our products, brands and supply chain leadership that sets us apart in the markets in which we compete.

With that, let me now turn things over to Bonnie to discuss financial results. Bonnie?

Thank you Sean. I will start with general comments before turning to segment results and then a few corporate items. As a reminder, the challenge we set for ourselves this year was to offset the impact of the economy-driven lower volume with cost improvements and other actions to manage cash flow. I am pleased with our consecutive improvements in operating earnings and with the cash we are generating from operations.

Despite continued volume pressure, adjusted earnings increased in each of our segments as we saw benefits from the actions that we have taken. Consolidated sales of $135 million were up slightly versus the first quarter with improved results in technical products offsetting lower Fine Paper sales. Demand for many high-end specialized products, especially those used for print advertising and in the housing and auto industries, remained weak. We are encouraged by more recent signs of recovery in filtration and a few of our other technical products markets.

Average selling prices were slightly above last year and our sales mix improved, although we're starting to see more aggressive pricing in some lower value segments as businesses compete for volume.

Adjusted operating income improved to $8 million from $5 million in the first quarter. We continue to carefully manage our operating schedules to control inventory levels and cash flow.

In the second quarter we operated at about two thirds of our target utilization levels. This is similar to first quarter run rates but significant significantly below last year. These reduced operating schedules had a negative year-on-year P&L impact of almost $10 million due to less efficient schedules and underabsorbed fixed costs.

On the positive side, input costs fell in the quarter and prices for most items remain well below prior-year. Input costs in the second quarter were $8 million lower versus last year and over $1 million better than the first quarter. Pricing for items like pulp and latex did begin to increase late in the second quarter, however.

Finally, as Sean mentioned just a moment ago, we are realizing important benefits from cost control initiatives we have enacted and we are pleased with the results of our teams in controlling costs both on a per unit basis and on an absolute dollar basis. In the second quarter year-on-year cost savings were approximately $5 million and included benefits from lower headcount, operational improvement and spending reductions throughout the company.

Turning next to segment results, Fine Paper net sales were $61 million versus $65 million in the first quarter and $85 million last year. The market demand for premium writing, text and cover papers continued to reflect the weak economic conditions. And the second quarter is historically one of the lowest quarters of the year. Selling prices on our branded products remained unchanged, held by our strong brand equity and support as well as the consolidation and rationalization that has occurred in the market.

Despite a lower topline Fine Paper operating income of $9 million, excluding restructuring costs and gains on asset sales, was essentially equal to both first quarter and year ago levels. This is a noteworthy accomplishment and reflects the success of our efforts to restore margins through controlling costs and improving operational efficiencies as well as benefits from lower input prices.

Adjusted operating margins in the quarter were 15%, the highest level in two years.

A key activity in the quarter was the shutdown of the Ripon mill. We booked $18 million for the closure costs comprised of $7 million to write down the assets and $11 million for severance, contract termination and other cost. Of the $11 million, approximately $5 million was paid in the second quarter and the remainder will be split between the rest of this year and next year.

As Sean mentioned, we expect to save $7 million a year as a result of our new, more efficient footprint and these savings started immediately in June.

In addition to the Ripon charges, there was about $1 million of other restructuring costs in the quarter primarily related to severance and other employee termination costs for changes in our Fine Paper organizational structure.

In technical products, quarterly net sales were $74 million, up almost 7% from the first quarter but down from $110 million last year. Lower sales versus last year reflected decreased market demand across all strategic business units due to weaker economic conditions and inventory destocking by customers that occurred early in the quarter.

Volume increased versus the first quarter in most categories including our larger filtration and tape product lines. Smaller product lines such as medical packaging, heat transfer and labels also did well as we began selling [furniture backer] into new local markets.

Technical products operating income was $3 million, significantly improved from a $600,000 loss in the first quarter, still below $6 million of EBIT in the second quarter of 2008. Improved performance versus the first quarter was due to higher sales and better mill operations as well as benefits from our cost reduction initiatives. Margins for technical products also improved, reaching 4.5% in the quarter.

Our teams in Germany and the US continue to find ways to control waste and reduce material costs, and we will see added benefits in the fourth quarter as we rolloff energy contracts that are at pricing levels higher than both the current market and the second quarter of last year.

Turning to consolidated corporate items, selling, general and administrative expense of $16.6 million decreased $1 million from the prior year, primarily as a result of our initiative to reduce spending in many areas. Unallocated corporate expense of $3.8 million was in line with last year.

Net interest expense was $5.3 million in the quarter. This is down from $6.1 million last year. The decrease was primarily due to lower average borrowings as well as a drop in interest rates. Our average interest rate for the quarter was 5.7%, made up of 7.375% rate on our bonds, just over 2% on our other US debt and then German rates ranging from 2.7% to 3.8%.

Looking at taxes, our blended tax rate increased from 18% in the first quarter to 45% in the current quarter, primarily as a result of the Ripon closure. As a reminder, the higher rate in the second quarter was actually a benefit since it was applied against a pretax operating loss. Our rate in the second half of figure should reflect more normalized results, but will vary considerably depending on the mix of income among entities.

Regardless of the book tax rate, we do not expect to pay any US federal income taxes in the next few years, since we do have significant tax operating losses available from our exit of the pulp businesses that can be applied against future US taxable income.

Let's look at pension and CapEx. Full year expected pension and other postretirement benefits expense of $14 million for the Corporation is about $5 million higher than last year's due to last year's lower returns on pension plan assets. While our US pension plan assets did comparatively well in last year's core financial markets, it was still down in absolute terms.

This year's performance has been good in both imperative and absolute terms. On a consolidated basis, we expect cash payment and expense for pension and OPEB to be about equal this year.

Capital spending was $1.4 million in the quarter and full year spending is expected to be around $10 million. As we have indicated previously, base maintenance capital spending for our new footprint is between $10 million to $15 million a year, excluding spending on major strategic investments.

Free cash flow, defined as cash from operations plus capital spending, was almost $5 million in the quarter even after one time cash payments of $6 million for the Ripon closure and other restructuring activities and $8 million for our semi-annual bond interest payment. Both of our core businesses continue to generate significant operating cash flow and have successfully decreased working capital with the tools and information now available to us.

Year to date, free cash flow of $31 million has allowed us to reduce debt to $338 million at the end of June. We have available borrowing capacity of more than $50 million and no major refinancing requirements in the near-term or concerns with our limited debt covenant.

An example of the cash generation capabilities of our businesses is free cash flow yield. On a per share basis free cash flow was $0.30 per share in the second quarter despite the one-time items that I mentioned. This results in a 12% annual yield.

Year to date cash flow is $2.11 per share. And even after subtracting $11 million tax refund received in the first quarter, cash flow per share for the first six months was $1.37, resulting in an annualized yield of over 25%. These numbers exclude our dividend, which at [$0.04] per share which represents an additional 4% yield.

So, to recap, our businesses are improving, growing margins and delivering positive cash flows despite the challenging environment. We have paid down debt, maintained an attractive dividend as we said we would. Our liquidity position remains sound, and actions we have taken to improve our cost structure will provide additional savings as the year progresses.

Sean, I will turn things back over to you.

Thank you Bonnie. I will wrap up with a few comments. Let me start as usual with the safety, as we continue to believe it is one of the indicators of a well-run operation.

This year our mills have reduced our reportable incident rate to 1.0 from 1.9 last year. We are achieving the world-class objective we set a few years ago, but I still believe we can continue to improve in this area.

Looking at the second half of the year, we are encouraged by recent quarter patterns and are seeing positive signs on the demand side especially in markets like filtration. In Europe, there's seasonal downtime in the summer and the third quarter is typically the slowest of the year. However, the extended downtimes many customers announced earlier this year have been curtailed to more normal levels.

While input prices have started to rise from lows in the second quarter, I expect our cost savings to increase as well with the Ripon closure. In fact, all of our actions over the past six to nine months, not the least of which has been the reduction of over 10% of our workforce, have resulted in a leaner cost structure in both our operations and staff groups that will further benefit us as volumes recover.

In the short term, we do not expect overall external conditions to return to normal. However, we have already taken actions necessary to adjust our cost base to deliver good margins and attractive cash flows in the current environment. Cash flow will remain a priority. We are prepared to quickly respond to any increase in volume, but we won't operate at rates above demand and build inventory in anticipation of improvements.

Let me end with what we said in our last call. We remain committed to our strategies and plans to generate long-term value. Our initial transformation out of pulp has been successful and has resulted in increased returns on capital.

Our focus is now on driving growth in our paper businesses. We believe our competitive position and leadership in our markets remain strong, and actions taken in supporting our customers throughout this period of turmoil will benefit us as a company for the longer-term.

We are doing what we said we would. Improving our cost structure and profit margins and generating cash flow that we would use to pay down debt. We also remain committed to providing investors with an attractive dividend. Our efforts are supported by the advantages of a capital efficient asset base, available operating losses to offset cash taxes and our employees who accepted the challenges of the market and economy and quickly took necessary action.

Finally, we are actively continuing our efforts to unlock value from the sale of our timberlands in Nova Scotia and now also from our mill site in Ripon, California. While more difficult in today's environment, we continue to believe these sales are probables and when completed will represent an additional and substantial source of liquidity and cash.

I would like to thank you for your time and interest this morning. I would now like to open up the call to any questions that you may have.

(Operator Instructions) Mark Weintraub, Buckingham Research Group.

First, could you give us a sense as to the magnitude of benefits you could accrue as the energy and dissolving pulp contracts come up for renewal?

Most of those -- and we have already negotiated most of these, Mark -- it is primarily in Europe where the gas contracts rolloff at the end of September. You will see year-on-year more than $1 million improvement in the fourth quarter in cost. At the same time, our coal contracts (inaudible) the prices of coal have come down fairly significantly. That will pick up also in the fourth quarter as we deplete the coal piles that were delivered last summer.

Okay, great. Are you also -- do you also have visibility on the dissolving pulp side?

We don't have a lot there. We used quite a bit of mercerized pulp in our filtration business in Germany. That is on a contracted price. But we have seen -- and those prices went up fairly dramatically last year. Our German team has done a marvelous job of substituting other pulps to reduce the impact of mercerized, and we are seeing the price of the mercerized come down and the overall cost of the products coming down also through the substitution effort.

So, order of magnitude, if I were to annualize the types of benefits from the -- at least the gas and from the coal, is $6 million or so. Is that a realistic type of number?

If you add gas and coal together, I would put it annualized at $5 million to $6 million.

Okay, great. And in the past you have spoken about long-term goals for the technical specialties business, hopefully get to 15% type of margins in this business. Obviously, we have a very difficult macro backdrop. But given the economic conditions we are facing, what are realistic types of goals for 2010 assuming business is maybe a little better but not a lot better?

The efforts that have been implemented to date, we have seen. I think as I mentioned, the overall profit margins in the quarter were 4.4%, and that is even with a significant amount of downtime both in Germany and the US. I was very pleased with the margins in June in the business.

I'm not saying they are at the long-term goal we have set at 15%, but the margins in June were attractive in the business. We have seen improvements in the business both from a cost and a volume standpoint as the quarter and year progressed. And as we said in the comments, we were -- we're pleased with the backlog that we saw coming into the third quarter.

I have a few more but I will circle back as other questions have been asked.

(Operator Instructions). Mark Weintraub.

Okay, I guess I will ask them now. You talked about the various things that are happening to the good in the technical specialties business. I assume your expectation would be that that business is going to see hopefully substantial improvement over the next 6 to 12 months.

As you look at the Fine Paper business, is that a different situation where you have had low input costs and given the secular headwinds that that is going to be much harder to get that business more profitable? Or do you think with the moves such as Ripon, etc. there is actually upside on the Fine Paper side as well?

Good question. As we said in the comments, the operating margins when you back out the restructuring in the second quarter was 15%, and that is even with the down time cost that were significant that we incurred. So we are pleased with the cost position of the business. They continued to do a wonderful job in areas such as distribution, where we continue to reduce our costs both on a per unit basis even with the lower volumes as well as in absolute terms.

We know where we make good money in Fine Paper. We continue to support that business. As we have mentioned, we are taking the market initiatives in terms of providing features and benefits to both designers and printers to increase the demand. Our overall strategy for that business, Mark, hasn't changed -- which is we think the market will continue to decline, the paper market in total. And our objective is to gain share in that market and we are bringing the innovation in supply chain and products to realize that objective.

Okay. So, when you think about what you can manage internally, then you balance that with some of the external forces such as pulp costs going back up, etc., is this a business where you still think you can run ahead of the pressures? Or is it going to be hard to do that?

I think we can. I won't forecast the pulp market. But if it behaves as it has historically, I would not expect significant increases in pulp. The economy just doesn't support it. I don't want -- I shouldn't make comments on the black liquor credit, but I don't see a lot of pulp guys taking down time these days either.

Okay, thank you.

You're welcome.

Aphrodite Garrison, Ingalls & Snyder.

As capital markets have improved here and some appetite has reportedly returned to more of the traditional players in alternative investments, I would imagine that you might be seeing a little more interest in the remainder of the timberlands sale. Is that true? Can you give us a little bit more color on any changes you've seen this quarter versus last quarter?

Good question. Obviously it is a tough market in timberlands. I think if you follow it, the number of transactions that have been announced has declined dramatically over the [experience] in last three to five years. There are some of the typical (inaudible) and other buyers that you have seen in the past and they're reassessing some of their investment strategies into alternative assets.

But you raise a good question in that we are seeing interest from a new class of buyers that is interested in, for instance, the biomass aspects of it, that is creating value over and above the typical fiber loop of sawmills and then the chips going to the pulp mills. And as cap and trade and greenhouse gas discussions increase, I think that group of buyers will increase over time.

That is interesting. Thank you.

Matt Jacob, KDI Capital.

Just wanted to get some color on the SG&A goals. I think you said you may be running a little bit ahead of the $10 million goal that you kind of set out. Is there -- can you kind of give me an idea of where you are on that $10 million goal? And then is there any up -- should we be thinking about any kind of annualized upside to that?

Let me give you a couple of comments and I will have Bonnie jump in. The $10 million that we talked about really after the first quarter call with some of the cost saving objectives across the board, that was not just SG&A but also manufacturing costs and we already realized that to date.

So our run rate, our teams have done a great job. Our run rate is well ahead of some of the earlier commitments we made. And the teams continue to add to it. We keep going back to the well to find further ways to reduce costs.

The Ripon program that we discussed with the closure, that $7 million in annual savings is incremental to that. So, we don't give guidance, obviously, on the total savings but we are very committed to this and exceeding our own expectations. Bonnie, anything you would like to add?

I've nothing to add to that.

We have no further questions.

I would like to again thank you for joining us and I look forward to our next call in early November. Thank you very much. You have a good day.

Ladies and gentlemen this does conclude today's conference call. Thank you for your participation. You may now disconnect.