Tredegar Corp (TG) 2003 Q2 法說會逐字稿

Good morning, and welcome to the Tredegar Corporation second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instruction will follow at that time. If you require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce Mitzi Reynolds, Tredegar's Manager of Investor Relations, who is your host for today's conference. Ms. Reynolds, you may begin your conference.

Thank you Smeah (ph). Good morning and welcome to our Conference Call, I am joined today by several of our senior managers including Norm Scher, President and Chief Executive Officer; Doug Monk Chief Operating Officer; Tom Cochran, President of Tredegar Film Products, Bill Wetmore, President of Aluminum Extrusions business and Drew Edwards, Vice President, Finance and Treasure.

Here is the agenda for today's call - I'll give a brief review of yesterday's release, Norm Scher will follow with some general comments and Tom Cochran and Bill Wetmore will review operating results in Films and Aluminum and comment on the near-term map work for each business. Drew Edwards will close with some comments on our financial condition. This should take no more than 15 minutes and they will open it up for questions.

Before proceeding, we offer the following cautionary statement. The comments we make today, and responses to your questions may contain forward-looking statements. Information concerning factors that could cause actual results to differ materially from those contained in such forward-looking statements is included in our annual report on form 10-K for the year ended December 31, 2002, which is on file with the SEC. In an effort to provide useful information to Investors, our comments today also include non-GAAP financial measure. For details on these measure including why we employ them and a reconciliation for comparable GAAP measure, please refer to our earnings release and the form 8K that has been furnished to the SEC, both of which are available on our website and at Tredegar.com. I'll begin with the summary of quarterly earnings by business segment. For those of you who have our press release in front of you, I am referring to the table on page 1.

Second quarter income from continuing operation under GAAP was $1.7m or $0.04 per share versus $14.3m or $0.36 in 2002. The after-tax loss related to unusual items, plants shut-downs, asset-impairment and restructuring activity was $3.8m or $0.10 per share versus the loss of approximately $200,000 or about a $0.01 per share last year.

Therics had an after-tax loss from on-going operations of $2.1 million or $0.06 per share versus the loss of [$3]m or $0.05 last year. Income for the quarter from on-going manufacturing operations was $7.6m or $0.20 per share, down from $16.5m or $0.42 in 2002. From this point on and unless otherwise noted, the comments we are making in today's call refer to results from on-going manufacturing operation.

Sales for the quarter were a $182 million, down about 10%, sales in Films fell 9%, while Aluminum sales were down about 11%. In Film Products, operating profits from on-going operations was $10.1m, which was below our initial guidance of around $12m. On June 16, we disclosed that Films would not achieve this 12m profit level. In Aluminum Extrusions, on-going operating profit was $4.9 million, down from $10.3m, last year. Tom and Bill will provide more details on manufacturing results in a few minutes. But first I will turn it over to our CEO Norm Scher. Norm?

Thanks Mitzy. Good morning every one and thanks for joining us. Earnings from our manufacturing operations remain depressed. As Mitzy pointed out about a month ago, we said that Films earnings would be below expectations. This result was driven by variety of factors that Tom will discuss. We expect the second quarter to mark a low point in this business for 2003, and we are expecting that sales and profits will grow during 2004. Aluminium Extrusions market conditions continue to be difficult. However, we are seeing signs that the industry fundamentals may be improving somewhat, at least in the short term. A continuation of this trend should translate into third quarter profits that exceed current levels. Beyond that, we cannot focus significant improvement in Aluminium's results, until we see more evidence over sustainable increase in order rates.

Predicting the outlook for our combined manufacturing operations, yes it's always difficult. That said, we do expect to see some improvement in the second half of this year. Longer term, we think we are positioned to deliver more significant profit increases in 2004 and beyond. As I said earlier, profits in Film should grow from current levels, Aluminum results should improve when the economy truly strengthens and we've lowered costs at both division and corporate levels that should ultimately yield about $30m in annualized cost savings. I assure you that we will continue our aggressive pursuit of all cost production opportunities. From that note, let me turn it over to Tom Cochran, President of Film.

Thanks Norm. Second quarter operating profit from ongoing operations was $10.1m, down from our initial expectation of about $12m. Last year second quarter operating profit was $18.7m. If you are comparing to prior periods, it is important to note that results for 2002 and the first quarter of 2003, include revenues and profits related to certain discontinued domestic back sheet business. On June 16, we disclosed that we would not achieve our initial profit guidance of $12m due to higher cost associated with raw materials lower than expected volumes from our seasonal customer and higher manufacturing cost on certain new products. Earlier this year, resin prices, which had already been on an upswing increased sharply. Unfortunately, we were unable to recover the full cost of these increases, which continue to put pressure on margins. The majority, but not all of our volume is currently protected by pass through agreements but rather cost-sharing arrangements with customers. In addition to higher resin cost, start-up cost related to certain new products, were higher than expected. As many of you know, our strategy is based on growing our sales of [apertured], elastic and breathable products.

Now we are currently in the process of commercializing several new products. These new product introduction and others that should follow are the keys to over coming the sales decline in domestic back sheet. I am happy to report that when you exclude domestic back sheet sales revenues from all other products are continuing to grow. Hopefully as inefficiencies related to new products start ups are addressed profits full improved? Accordingly, we think the second quarter will prove to be the low point this year. And we expect sales and profits to accelerate in 2004. Next [up] is Bill Wetmore who will cover our Aluminum Extrusions. Bill.

Thanks Tom and good morning folks. Second quarter sales in Aluminum Extrusions were down about 11% compared to last year. Operating profit from ongoing operations was $4.9m, and that's down from $10.3m in 2002, but it's up from the last two quarters.

Volume for the quarter declined about 8%. As Norm mentioned for the first time in a long while we all are beginning to see some signs that our industry may be getting at least a little bit healthier. Our recent orders have strengthened and that consistent of what we are seeing and hearing about the overall industry. In the near term third quarter profits should improve from current levels. Given the weakness of the last three years, prudent dictates caution when we considered the longer term out look. Simply put, we really need to see a steady and sustainable increase in orders before we can expect a significant turn around in profits.

But in the mean time we continue to make a lot of progress on our strategic initiatives and that will be very instrumental to our future. These include improving our business process to accelerate growth in preferred end market and implementing various approaches for improving customer satisfaction. Also we continue to explore all opportunities to make significant reductions in our cost structure, including actions aimed at improving near term performance. We looked forward to be in that position to reap the benefits of both operating leverage and superior customer service in an environment where volume is going up. I will now turn it over to Drew Edwards, Vice President, Finance and Treasurer, who will cover cash flow and financial conditions. Drew?

Thanks Bill. Pro forma net debt, which is debt net of cash and income tax recoverable from the sale of the venture capital portfolio was $63m at the end of the quarter, this is less than one times the last 12 months adjusted EBITDA from manufacturing operations and well within investment grade guidelines. We are currently working with our banks to refinance our debt and lengthen maturity. We will provide you more information once the refinancing is complete. During the quarter we purchased 249,800 shares of our common stock for $3.2m, which equates to an average price of $12.94 per share. So far this year, we've purchased 406,400 shares for $5.2m, or an average price of $12.72 per share. Our remaining authorization enables us to purchase up to an additional $3.4m shares. I'll now turn it back over to our operator, who will open the call up for questions. Thank you.

Thank you ladies and gentlemen. If you have a question at this time please press star one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue please, press star two. If you are using a speakerphone please lift the handset before asking your question. Again, if you have a question at this time please press star one on your touchtone telephone. One moment please for your first question. Your first question comes from Harden Bapiah (ph) of [Inaudible] . Please proceed with your question.

Hi Harden, how are you?

Great! Good morning. My question is related to the ultimate cost saving that you expect to realize. You mentioned $30m; I was hoping you could help me understand when those cost savings are expected to start take hold and as well what segment they will affect.

Ok, Drew, why don't you expand on that?

A large portion Harden of the 30m cost savings is already included in our historical result. Our goal here is to try to generate cost savings greater than cost increases that are built into the system such as labor rates and salaries. However, there is no guarantee that we'll be able to accomplish that goal. If you look at the first six months of 2003 Harden, for manufacturing operations on a pro forma basis, had we realized those cost savings for the entire six months period, our operating profits would have increased by about $5m.

Okay. Great, that's helpful. As well, in what time frame would you expect; you may have said this but I missed it, I apologize, in what time frame would you expect to be able to update us on your progression with the refinancing of your debt?

We hope to have that refinancing Harden completed by the end of the third quarter. Whenever we do complete that refinancing, we will update you at this time, probably through a press release.

All right, thank you very much.

Thanks Harden.

Your next question comes from Louis Sylithia (ph) of Fahnestock & Company.

I'll get it. Thank you very much.

Hi, Louis how are you?

Fine thanks. I very much appreciate you giving me the adjusted book value at the present time, unrelated for the price that you're paying for the stock in the open market.

Okay, Drew, Do you know our adjusted book value.

I can tell you, our book value, which is Shareholders' Equity as of June 30, was $424m. We also had $230m of debt and $113m of cash I mean, you could net out those numbers if you want to get to total net capitalization. I hope that answers your question, were you looking for something more?

I'm looking for a precise number.

On a per share basis?

Yes sir.

We have $424m worth of book value and 38.1m shares outstanding so, the equity book value per share is about $11.12 per share.

Do you have a firm price at which you would buy back the stock or it depends upon market conditions?

Depends on markets conditions, whereas we have no firm price.

Okay thank you.

Your next question comes from Rob Norfleet of Davenport & Company.

Hi, Rob how are you doing?

Good morning. I'm fine, thanks. Just a couple of quick questions. First, it's on Corporate expenses, I know for the quarter, that number is up and obviously as you all noted in the release there were number of pretax charges. Can you give some form of guidance relative to the second half of the year? How the Corporate expenses numbers should run? and what other types of charges should we expect?

Okay, Drew, they’re are all over here today. So, I'll turn that one over to you too.

Okay, for the six months, first six months in the year, corporate expenses stayed on page 8, of the earnings release of the financial tables was $4.5m now, included in that number is the $1.2m of restructuring charges that was recorded during the second quarter. So, if you remove that from the $4.5m for the first six months, our corporate expenses [inaudible] $3.3m and at this point I would just multiply that number by two to come up with an estimate for the annualized amount.

Okay great. And quickly Norm just a question for you. I know that, when discussing the Aluminum Extrusions segment, one of the issues was the impact that brought an [Inaudible] was having this in, at some point I know there was some discussions around a means for Tredegar play a middle man a way to offset some of the declines in volumes through setting up some sort of, I don’t know if joint ventures is the word, but partnership. Are we still looking at that as a potential offsets for the foreign imports?

Yeah, Bill Wetmore, ought to give you more of an elaboration, but the answer is yes, we are still looking at it. Bill, do you have a quick update on that?

Yes. We continue, Rob, to monitor the situation as far as international imports, China being the major one and what areas, markets they are trying to penetrate. Of course we've running into some issue dealing with the lead time and quality and responsiveness on this service but as far as us taking advantage of low cost sourcing, we are doing that. We are acting as a middleman at this point. We will do in select areas where we either don't have the capabilities or on lower margin price conscious type business. Sometimes, even driven by where the costumer requires it. We have established a couple of real good suppliers over there and where we go longer terms with this, I rather not get into at this point but we are looking at the next level of formalizing the opportunity use low cost international sourcing.

Yeah, Rob, I guess what I would add to that is that as you are well aware, this is just one of our consuming quests to try to figure out ways to reduce fixed cost in this business and in no way are we leaving anything out of the table that can reduce fixed costs. So I am proud of Bill and his folks because they are digging into this is as a constant and recurring theme.

Great. Thanks for all your help.

Your next question comes from Ed Bryer (ph.) of Sterling Capital.

Hey Ed, how are you?

Good morning. Lets see - a few questions. The first one on Therics. For a second, I didn't see any revenue coming out of Therics of any sort in the second quarter. I know that I guess you made the announcement a few months back about an FDA approved product. So, I am wondering, will we see revenues out of Therics?

I’m actually pleased that was the 5th question before we got into Therics but we are going to make an announcement to bring everybody up to date with our October earnings as I told you. Therics right now is in the planning phase of what their business plan could look at-- like and their description of when those near term revenues can obtained is going to be extremely important to me. So, as of today although we did get clearance on the TheriRidge there are no revenues coming in the door except for a very modest sale we made. More to come and more complete information will be coming to you in October.

The second question is as you look at, and I know it is early to talk about capital spending for '04, but I do know this year you have some new plant production overseas for Film, can you - any early indications of what the '04 budget might look like directionally for capital spending relative to this year?

Okay, and I think you are taking about Films primarily, so let me ask Tom to comment on that.

Ed, Films, we spent about 45m in this year, my outlook for next year is some where between 30m and 35m-- in the early planning stages.

Right. And Aluminum, shouldn't expect anything significant relative to this year?

Well, Ed in aluminum it's actually got to be below 10 this year and we expect more in the neighborhood of 15. I am sorry; it will be in the neighborhood of 15 this year. And probably pretty much inline with that next year too, Ed.

Okay. And what say and then, I guess finally you mentioned strength in aluminum, I wonder if that is just particular one off deal or if there is any particular end markets you want to talk about that look like they are firming? That's the question.

Let me before - I want Bill to answer that, but before he does, let me say that we choose our words very carefully on anything we say and we have been very careful in the release and I want to emphasize that this is a very early improvement that, if it continues, I think we will have a lot more to say in October. So that said; Bill, on a preliminary basis give a little bit of a flavor to Ed's question.

Well Ed, I will give you a high level response and then you talked about the end market, so I will comment on that too. Towards the end of April, we along with the industry started to see an increase in bookings in the neighborhood of 15%. So we ramped up our production capacity to meet this. It has been fairly consistent and holding, so our backlogs have gone up -- our backlog here has gone up somewhat. So that's how we feel comfortable when we make a statement that in the third quarter we hopefully expect to see higher shipments or volume levels than in the second quarter. So, that's my general comment. As far as the markets, what we see happening during this period is, this two or three, really three month period is, it's picking up in our finish areas, in our anodized and in our paint areas, more so that in mill finish. And so that covers a lot in both residential and commercial constructions and may be some specialty type distribution. One area, I will single out for example is wood clad in use market has picked up and that's obviously a high end associated with residential. Does that help you out, Ed?

Yeah sort of. That's all I have.

Thank you.

Your next question comes from Tim Hossero (ph) of Kennedy Capital (ph).

Hi Tim.

Good morning. Just with respect to Therics, I just wanted to get a clarification. There was no revenue in the quarter is that correct?

That's correct.

And you know you've got the TheriRidge block approved in March, why wasn't there any sales in that June quarter?

Well, as we said we are looking at the best possible way to market Therics products. And the TheriRidge is a product that is the first and only product that has been cleared. We also have announced that we have filed an application to the FDA for a [Inaudible] product that has not yet been cleared. So we are in the process of analyzing where our markets may be and where our sales efforts, assuming that we are going to continue looking at Therics should be implemented, and that's under new management and new views. So, it's premature to go beyond what we've said.

Okay, and, I asked this last time just with respect to Therics. Are you going to look at the business as a return on invested capital or are we going to get a return on our money here? Is that how you are looking at it or how are you looking at it going forward because, it cost $0.15 so far this year. I assume that it'll be at least that much the back half of the year, just curious how you are looking at the business?

Well, again Tim not to avoid your question, I will be in a much better position to answer that question when I have complete information, I will not have that complete information until October announcement. At that stage I'd be in a position to answer your question with a lot more data than I have today.

And you feel, you must feel that, you have the experience at Tredegar to run a medical, biotech, sort of business here, and invest a lot of money and a lot ofshareholder's money. And then you have their expertise and experience from the top level and the board level to oversee this whole thing. [Inaudible] you seem too strategic to be at all here. I don't understand how this fits in?

Once again Tim, I think what we say in October will be much more meaningful than for me to tell you that I have experience in running a biotech company, I’ve hired management, and I am very interested with that management might say.

Okay. Thank you.

Thank you.

Once again if you have a question at this time, please press star one on your touch-tone telephone. Your next question comes from Patrick Morgan (ph) of Rock House Research.

How are you?

Good morning, thanks. Just a follow-up question on [Therics], I know its a sore subject here but. What was the [carrying] value of your investment in Therics at the end of the quarter?

What was that Drew? is what we’ve got [inaudible] balance sheet at.

I am sorry 10m?

$10m yes.

Okay. And then as far as the possibilities, the courses of action, could that still include just shutting Therics down. And what type of charge would there be in addition to the $10m to wrap it up, if that's a possibility?

Oh, it's clearly a possibility, as I said we have made no decision, we will announce where we are in October. But - and I appreciate your asking that question, because earlier questions have indicated that we have sort of taken a course here, and we've tried to say to everybody we have not. And I would remind you and others, that when we had an issue with Molecumetics we did act on Molecumetics and shut that business down, so that's said, Drew you want to respond.

Yeah. This is a real ballpark estimate, but in addition to the $10m that you would have to write off - sort of a carrying value of assets, roughly speaking another $10m of shut down cost is what we estimate. That's a very rough number. And that - that includes an estimate for a loss, on a lease that we have at Therics, Princeton, New Jersey.

Okay. And then those are pre-tax numbers obviously.

Those are all pre-tax amounts.

Okay. And would those be cash charges primarily?

Yeah. The 10m would be cash charges, where we get a tax benefit, also get a tax benefit on the 10m write-off of the asset.

Okay. Thank you.

Thanks.

Thanks

Miss Reynolds. There are no further questions.

This is Mitzi Reynolds. I want to thank everyone for participating in our call today. We look forward updating you in October.

Ladies and gentlemen, thank you for your participation in today's conference. This call will be available for replay beginning at 2:00 pm EST today, through 11:59 pm EST on July 29. The conference ID number for the replay is 154-8110; again the conference ID number for the replay is 154-8110. The number to dial for the replay is 800-642-1687 or 706-645-9291 for the international caller. An archived copy of the web cast will be available for replay on the company's website www.tredegar.com beginning at 2:00 pm EST today, for approximately two weeks, to listen to the call select the web cast of second quarter results link on the what's new on the home page. This concludes the program you may now disconnect.