Tredegar Corp (TG) 2003 Q3 法說會逐字稿

Good morning And welcome to Tredegar Corporation's Third Quarter Earning Conference Call. (OPERATOR INSTRUCTIONS) 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, Shamiga [ph]. Good morning and welcome to our conference call. I am joined today by several of our senior managers including Norm Scher, President and CEO; Doug Monk, Chief Operating Officer who is joining us from Newnan, Georgia; Tom Cochran, President of Tredegar Film Products; Drew Edwards, CFO and Treasurer; and Tom Stribling, President, Therics.

Here's the agenda for today's call. I will give a brief review of yesterday's earnings release. Norm Scher will follow with some general comments and Tom Stribling will close with an update on the status of Therics. Then we will open it up for questions.

Before proceeding we offer the following cautionary statement. The comments we make today in 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 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 measures. For details on these measures, including why we employ them and a reconciliation to comparable GAAP measures, please refer to our earnings release and the Form 8-K that has been furnished to the SEC, those of which are available on our website at tredegar.com.

I will 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. Third quarter income from continuing operations under GAAP was 6.4 million or 17 cents per share versus 11.9 million or 30 cents in 2002. The after-tax loss related to plant shutdowns, asset impairments, and restructuring activities was 2.6 million or 7 cents per share versus a loss of 114,000 or about 1 penny per share last year. Therics had an after-tax loss from ongoing operations of 1.7 million or 4 cents per share versus a loss of 2.2 million or 5 cents last year.

From this point on, unless otherwise noted, the comments we are making in today's call refer to results from the ongoing manufacturing operation. Third quarter net income from ongoing manufacturing operations was 9.3 million or 24 cents per share, down from 14.2 million or 36 cents in 2002, but up from second quarter earnings of 7.6 million or 20 cents per share. Third quarter sales were 193.1 million, down slightly versus last year but up from 181.6 million in the second quarter of this year. In films, net sales for the quarter declined slightly versus last year but were up 4% on a sequential basis. Operating profit in films from ongoing operations was [10].8 million versus 16.6 million last year and 10.1 million in this year's second quarter. In aluminum, third quarter net sales were flat versus last year and up 8% sequentially. Ongoing operating profit on aluminum was 6.5 million for the quarter, down from the 8.1 million last year, but up from 4.9 million in the second quarter.

I will now turn it over to our CEO, Norm Scher. Norm.

Thanks Mitzi. Good morning everyone and thanks for listening in. As expected, earnings from our two manufacturing operations were down compared to last year and continue to be less than satisfactory, but we were encouraged by the sequential improvement in both units. Results in our films business were down sharply from last year's third quarter, which as Mitzi noted, included certain domestic diaper backsheet business that has since been discontinued. In this case, we think sequential results provide more meaningful comparisons than year-over-year results. On a sequential basis, third quarter profits exceeded second quarter levels, but the rate of improvement was slowed by expenses related to new product introductions and capacity expansions in Europe, China, and the US. These expenses combined with a recent spike in resin costs are continuing to affect performance. As a result, fourth quarter profits in films are likely to about the same as third quarter levels.

We expect gradual improvement in sales and profits during 2004. As many of you know, our strategy is based on growing our sales of aperture, elastic, and specialty films. This year alone, we will invest about $55 million building infrastructure to support global opportunities for these products, several of which are in the process of being commercialized. These products and others that should follow are the keys to overcoming the decline of our domestic backsheet business. So far the results are promising. When you exclude domestic backsheet sales, revenues in films are continuing to grow. As sales from new product lines grow, associated startup costs decline and resin prices moderate, profits should improve as well.

Turning to Aluminum Extrusions, profits declined from last year's third quarter but improved on a sequential basis. When we spoke with you in July, we said market conditions seemed to be gaining strength. Unfortunately, the pickup in orders trailed off as the quarter progressed. Looking at the fourth quarter, which marks the beginning of a seasonally weak period for this business, order rates and therefore profits, look as though they will not improve over year-ago levels. Longer term we think we are positioned to deliver profit increases in 2004 and beyond. As I said earlier, profits in films should improve gradually from current levels and Aluminum results should pickup when market conditions show more sustainable improvement. Finally, aggressive cost reductions at both division and corporate levels should ultimately yield about 30 million in annualized savings, and we are continuing to pursue additional cost reduction opportunity.

I know you will have questions about films and Aluminum, but before we open it up I want to spend a few minutes on our decision to support the 2004 rollout of a new line of orthopedic products at Therics. As most of you know, last April we announced we are reassessing our strategic alternatives for Therics, a business that we felt had value that was simply not being recognized. Since then we've hired a new management team that has narrowed the focus of the company and injected it with a vigorous results-oriented mindset. They are keeping costs under control and expect to begin commercializing products in the very near future. I'm going to let Tom Stribling, the new President of Therics tell you about his plans in just a minute. But first I want you to know that our decision to continue funding Therics was very carefully made. I believe that our technology is unique and that it can create significant value for our shareholders. In my view, to suspend or cease funding this technology now is inappropriate. I can assure you that our path forward is clearly, clearly defined, measurable, and will be monitored closely. We'll update you on our progress on a regular basis. I thought it made sense for Tom to join us for today's call. Tom has more than 25 years of experience in the healthcare field. He served in leadership positions at a variety of companies including turnarounds and other situations that resulted in successful sales to larger pharmaceutical companies. I have great confidence in Tom, his team, and their ability to deliver results while controlling expenses. On that note, I'll turn it over to Tom.

Thanks, Norm. Good morning. I'll start by thanking Tredegar’s management for the confidence they have placed in our team and me personally and most importantly in the Therics Technology. I also want to make it very clear upfront that we know our success depends on an ability to deliver results and deliver them quickly. In fact, I took this job because I believe the prospects for achieving those short-term and long-term success are very compelling. There is no doubt in my mind that the technology is unique and has great potential. To reach that potential, we're transforming Therics from a research organization into a results-driven company that develops, manufactures, and sells products needed in today's orthopedic marketplace. [Inaudible] we expect to begin generating revenue the first half of 2004. Operating losses, currently about 3 million per quarter, should remain flat for mid year 2004 and begin to decline during the later half as revenues grow.

I can assure you my confidence in Therics is based on a lot more than the merits of our technology, which are considerable. What excites me even more is the needs of the marketplace are real and they are well suited to our capabilities. The feedback we've received from orthopedic surgeons and our own market research has been overwhelmingly positive. Our marketing efforts are headed by Ben Shappley who has more than 23 years of orthopedic and neurological implant experience. [indiscernible] because it is obvious to him that we have superior technology and can offer products that outperform competition. The orthopedic niche in which Therics is developing products is referred to as orthobiologics. Orthobiologic products use biology and biochemistry to repair, replace, or regenerate musculoskeletal structures. The niche market for these products in the US is currently estimated at more than $700 million and projected to grow about 25% annually for the next several years. Not surprisingly, it's the aging baby boomers who are driving this growth. They are not only are getting older, they are living longer, and that means more hip surgeries, knee surgeries, spinal fusions, and a long list of other bone-related maladies that require grafting and void filling procedures.

We intend to penetrate this market using our proprietary TheriForm technology to develop an initial line of bone graft implants. The pipeline currently includes a family of products scheduled for launch in the first half of 2004. In the near future, we plan to develop more sophisticated products from human tissue that can propel Therics into a position of market leadership. In summary, the orthobiologic segment of the orthopedic marketplace has significantly growing needs that are not being well met. I'm convinced that Therics is uniquely positioned to meet those needs, and we are ready to begin doing that now. Thanks for listening in today and I look forward to answering your questions.

(OPERATOR INSTRUCTIONS) We do have a question from Timothy Hayes from BB&T Capital Market. Mr. Hayes has withdrawn his question.

(OPERATOR INSTRUCTIONS) We do have a question from Rob [Norfleet] of Davenport.

(technical difficulty) -- In some manner the growth that we're seeing in Asia Pacific and in Eastern Europe versus the more mature markets such as the United States and Europe?

Hey Rob, we didn't hear the beginning of your question. I'm assuming it was directed to Tom Cochrane, it was a films question on the growth of Southeast Asia, is that right?

Yes correct, I'm sorry, Let me repeat it (inaudible). Just getting a little more color on the films area. Can you just quantify the type of growth that we were seeing in the films segment in Asia Pacific and Eastern Europe versus some of the more mature markets such as the US and Europe?

Okay, Tom Cochrane, would you respond please?

Hey Rob, as you know that the North America and Western Europe and Japanese markets are relatively mature. And so our volumes are relatively mature in those markets also. Outside of those markets, China, Asia Pacific, some regions [ph] in Europe are growing faster. Together today those regions comprise about 20% of our overall current global demand. And diaper and napkin demand is growing about 6% per year in that part of the world. So our market -- our growth rates are certainly higher in those regions.

Okay. And I guess in looking at some of the issues that were cited as some of the weakness in films during the quarter, Tom, can you kind of quantify to some regard the -- what resin costs, product introduction, and capacity additions individually what each one of those represented in terms of -- you know, it's contribution from the cost standpoint to the quarter. What -- what was the biggest hit?

Well, Rob, we’re not satisfied with current profit levels as Norm said. But in -- I would -- I just would like a chance to talk about several factors that are impacting current profits because they also are impacting us and making us more cautious in setting near-term expectations. Resin costs are one thing -- resin costs have increased again right at the end of the third quarter, and we don't expect a softening as we go forward.

Are we getting any pass through of this cost to our customers?

We would pass along the majority of cost increases. In general, I think about 70%. But that takes time. Some of these run on lags and in some cases, we're not passing along the increases but we are able to pass along about 70% of the increases over time. The new product sales are growing but they are happening a bit more slowly than we'd expected. But perhaps most importantly right now is the -- the cost of achieving these new sales. are turning out to be higher than we expected. And we're accelerating spending to introduce these products as quickly as possible. Our capital expenditures this year have been increased about $55 million to reflect this acceleration. This is increasing depreciation about $4 million in '04 and associated project expenses, and the costs that we're putting into our plants to support these new products are also increasing.

Okay. And just quickly, if we take out obviously the higher resin cost, because obviously we can’t control that, looking into '04. What additional costs should we still be incurring – both from a capacity upgrading standpoint and from an initiation of new products. I mean, should these costs start abating, as obviously these products are rolled out?

Well, as we go forward that [appreciation] I mentioned will be about $4 million our projects costs -- project startup costs are probably in the similar range to that as we go into '04. This is additional costs of introducing new products. But I think most importantly is the -- as the new production launch is starting up and as these new product lines are beginning, you know, as we go into next year, we would expect revenues and the margins from these new products to start offsetting these additional costs. But we're looking right now predicting the point of that -- of when that turnaround is going to happen and when we can expect improvement to be more dramatic. It's very, very difficult.

Okay. And the last question, Norm this is either for you or Tom. I guess in terms of Therics, my main question is obviously you see a lot of potential value here that's not being recognized by the market. Obviously, we're going to continue to run this operation. I guess from a long-term perspective, are we looking to add this segment as a core piece of Tredegar and a contributor to both revenues and earnings or is this more of a business where we believe we can grow it up to a point over the next 12 to 8 months where we can monetize it for a value obviously much more than what the market's valuing it for now?

Right.

I guess is this a keeper or is this — - we’re just going to kind of build it up and then monetize it.

Right. The -- that depends on what happens at Therics. My hope and expectation is that our decision to fund up their line of orthopedic products will be met by good results and hitting milestones and doing exactly what Tom Stribling said that he hoped was going to occur. Obviously, if that does occur, our degree of interest in Therics would improve. If that doesn't occur, then we will have to take appropriate action whatever that might be. So, again we made it very carefully -- stated in our release that the only decision we have made is to fund this new line of products, and you've heard Tom describe his understanding of what that means. Beyond that, it clearly depends on the results of the development of that new line of products and it's really just too early for me to answer your question beyond that.

Great. Thank you for your time.

You're welcome.

Your next question is from Harden Patel [ph] of [indiscernible].

Hey Harden, how are you?

Hey fine. How are you doing Norm?

Doing fine.

My questions are, I guess I have two. One is related to aluminum and I think it was probably a number of quarters -- I mean a number of months where you saw and the industry saw improvement in volumes on a year-over-year basis. Then -- so what is it that happened? I assumed it happened in September -- August or September that those order levels returned to the previous year's at a run rate. What is that happened? Can you kind of characterize that market a little bit better and what opportunity there is to further improve the operating margins at the current level?

Absolutely. Let me ask Doug to respond to that. As you know, Doug has had a little bit of experience in cycles in the industry, and it makes me feel good to say he has had 31 years of experience because that doesn't make me feel quite as old as I am when I hear about 31 years of experience. So, would you bring those 31 years, Doug, to bear on answering that question?

Well, we'll give it a shot. We did see orders go up in the spring, say May through August and we've seen them go down since then. It's the same pattern that we've had in the last two years. We have not seen in our industry that the economy has helped out our industry at all, but we're continuing to see the same pattern over and over again. I guess hopefully if the economy does improve, then we will start seeing the orders in the overall industry improve.

Do you have a follow up to that Harden?

Well, I guess, I mean you all have done a pretty good job of maintaining your profitability in that segment despite, I guess, years of decline and I guess things are kind of back where you were before. What else can you do to improve the profitability of this segment despite, I guess, given the current outlook for the market?

What we'll do short term is continue to work very hard on cost improvements and cost reductions, and I guess the real question becomes does this market stay the same way it is forever? Has the structure of the whole market changed and if that's true, we'll do some other things to make sure that we match and can improve our margins. If it -- if as in the past as the economy improves, our volumes improve then that gives us lots of opportunities to increase margin.

I guess my second question is, Norm, related to the annualized cost savings that you expect to realize. I guess my question is when would those -- when would you assume those are going to be fully in effect and is there some kind of deterioration or are there things that are going against that, that on a net basis would cause it to be something less than 30 -- 30 million?

Yes. Let me get Drew to give you the full answer, but the answer to your second question is clearly yes, and that is that the cost increases that are built in unfortunately to both aluminum and films are there and they need to be monitored extremely carefully as we talk about cost savings things so Drew why don't you give an answer to Hardin [ph] and we we'll see if he needs to follow up on it?

Sure Norm. Hardin, a large portion of the 30 million annualized cost savings are already included in our historical results. On a pro forma basis, had we realized those cost savings for the entire year our operating profits would have increased by about $3 million, and on a net basis, taking into account the cost increases built into the system, the pro forma operating profit increase would be about a $1 million and it's just manufacturing operations. Hopefully, that answers your question.

Yes. Now, regarding your – Drew, I guess this is another question for you -- regarding your recent refinancing of your bank credit agreement. Does that allow you to do some other -- some other things regarding your capital structure that you have been considering. I know you approved a significant share repurchase authorization earlier in the year, but have done little – have repurchased little stock under that so far as well does it give you some other opportunities that the board, may be considering given the increase in longer term liquidity.

Let me -- jump in and answer that. I will ask Drew to supplement it, but let's -- we were very carefully involved -- or I was to be sure that the answer to the question that you've just asked was, yes. We have ample flexibility under the new loan agreement to do any sort of capital reorganization or use of capital within re [indiscernible] shares, to pay dividends and like. So, I consider our covenants to be extremely flexible and to allow us to do generally what we've been able to do in the past within a reasonable time frame. Would you agree with that Drew?

Yes, and Harden, let me give you some of the -- summary of the key provisions of the agreement that deal specifically with your point, but first, I would like to say that when we file the 10-Q in a couple of weeks, the credit agreement loss will be filed with that 10 Q. So you can read that agreement, but some of the key covenants associated with the agreement are a minimum net worth requirement is 325 million and our net worth today is over $430 million. The dividend basket is $100 million. So over the term of the facility, we can pay up to $100 million of dividends. The key covenant on borrowing capacity is a debt to EBITDA we can borrow up to 3 times, their EBITDA and on a pro forma basis for acquisitions, we can borrow up to 2.5 times EBITDA. Hopefully that gives you enough color around that credit facility that answers your question.

Great. Thanks.

You're welcome.

Your next question is from Timothy Hayes of BB&T Capital Market.

Hey Tim. How are you?

Good morning. Two related questions for the aluminum business. The first is, if I'm looking at industry data, industry orders, if I had to put a guess on Q4 order levels, it would be significantly higher than last year's depressed order levels. Given your guidance, I would be inferring a loss of market share on that. I'll Have you -- if you don't mind commenting on that if -- my logic is making sense there and then I'll listen for that and ask you a second question after?

Okay. Let me ask, Doug to comment and then you follow up. Go ahead Doug.

The first thing, the only thing, I can comment on the forecast for the fourth quarter is it's anybody's guess and the only thing I'm seeing today is that our order pattern is following the same order pattern that we have seen the last 2 years. Hopefully that won't continue and will come to some flat part based on what we know as far as our market shares that we have not lost any market shares.

Okay, very good. And the second question is on net exports of extrusions from China, I think I saw some industry data where net exports from '01 to '02 I think it was or at least from last year to this year had tripled in size. Do You see that intensifying that being the net exports becoming larger out of China or is that going to reach a plateau and then maybe fall back a bit?

Well, my basic opinion is that international extrusions have been continuing to come into the US and it's not only China, but other places. And it will reach a certain point where that will stop because they can't service the market. Where that point is, I'm not 100% sure.

Okay. So, maybe a little bit more to go then?

Yes. That's probably right.

Okay. Thank you.

Thanks Tim.

(OPERATOR INSTRUCTIONS) Ms. Reynolds there are no further questions at this time.

Thank you and I want to thank everyone for participating in our call today. We look forward to updating you in January.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This call will be available for a replay beginning at 2 o'clock pm Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on October 29. The conference ID number for the replay is 3266283. Again, the conference ID number for the replay is 3266283. The number to dial for the replay is 800-642-1687 or 706-645-9291 for international callers. An archived copy of the webcast will be available for replay on the company's website www.tredegar.com beginning at 2 o'clock pm Eastern Standard Time today for approximately 2 weeks. To listen to the call, select the webcast of third quarter results linked under "what's new" on the home page. This concludes the program. You may now disconnect.