Tredegar Corp (TG) 2003 Q4 法說會逐字稿

Good morning and welcome to the Tredegar Corporation first quarter earnings conference call. At this time all participants are on a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If you require assistance during the conference, please press star zero on your touch tone phone.

As a reminder, this conference call is being recorded.

I would now like to introduce Mitsy Reynolds, Tredegar’s Director of Investor Relations who is your host for today’s conference. Ms. Reynolds, you may begin your conference.

Thank you. Good morning and welcome to our conference call. I’m joined today by several of our Senior Managers including Norman Scher, President and Chief Executive Officer, Doug Monk, Chief Operating Officer who’s joining us from Newman, Georgia, Tom Cochran, President of Tredegar Film Products, Tom Stribling (ph), President of Therics is who is joining us from Princeton, New Jersey, Andrew Edwards, CFO and Treasurer.

Here is the agenda for today’s call. I’ll give a brief review of yesterday’s earnings release, Norman Scher will follow with some general comments and then we’ll open it up for questions.

Before proceedings, we offer the following cautionary statements. 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 in our annual report on Form 10-k for the year ended December 31st, 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 reconciliation to comparable GAAP measures, please refer to our earnings release and the Form 8-k that is been furnished to the SEC, those of which are available on our website at Tredegar.com.

I’ll begin the summary of quarterly earnings our business segments. For those of you have our press release in front of you, I’m referring to the table on page one (1).

Fourth quarter income from continuing operation under GAAP was $6.4m or 17 cents per share versus $12.4m or 32 cents in 2002. 2002 results including net after tax gain up $3.9m or 10 cents per share for unusual items. Fourth quarter 2003 results include an after tax loss related to plant shut downs, asset impairments and restructuring activities of 900,000 or about 2 cents per share. The loss in the fourth quarter of 2002 for these items was $1.5m or 4 cents per share. Therics had an after tax loss from ongoing operations was $1.6m or 4 cents per share versus the loss of $2m or 5 cents last year.

Fourth quarter 2003 results also including net after tax gain of $2.8m related to the sale of real estate and securities. From this point on unless otherwise noted, the comments we’re making in today’s call refer to results from on going manufacturing operations. Fourth quarter net income from on going manufacturing operations was $6.1m or 16 cents per share down from $12m or 31 cents in 2002. Fourth quarter sales was $181.9m up slightly versus 2002.

In Film products, net sales for quarter declined 5% to $91.5m. Operating profits from on going operations was $10.8m versus $18.9m in 2002. Results for the 2002 quarter include volume short fall payments of $6.8m. There were no such payments in the fourth quarter of 2003. It’s important to note that 2002 results include sales of certain domestic back sheets to P&G that was discontinued at the end of the first quarter of 2003.

In Aluminum Extrusions, fourth quarter sales were up 6% to $85.5m. Operating profits from on going operations declined to $2.5m down from $3.6m in 2002, due primarily to the adverse effects of appreciation in the Canadian dollar.

I’ll now turn it over to our CEO, Norman Scher. Norman?

Thanks Mitsy and good morning everyone and thanks for listening in. Not much has changed since our conference call in October. Both of our manufacturing businesses ended the year with little momentum going into the first quarter. On the other hand, we remain optimistic that it’s only a matter of time before we realize the pay off on our substantial investments and continuing cost production efforts.

As Mitsy pointed out, fourth quarter profits in Films were down sharply from last year’s fourth quarter which included certain domestic back sheet business that have since been discontinued and related volume short fall payments. On a sequential basis which we think is a more meaningful comparison, fourth quarter sales and profits were essentially flat, compared to the third quarter, as results continued to be affected by higher resin costs and expenses related to capacity additions in Europe, China and the US.

Looking ahead to the end of this quarter, we expect profits to remain near fourth quarter levels. It will be difficult to achieve profit growth until we see a substantial increase in sales, especially sales of new products which are the key to our growth strategy. The good news is we are seeing some positive signs. For example, last year we began the roll out for the new feminine pad top sheets for P&G European markets. Roll out is going well and we continue to invest and increased European capacity. I believe that our continuing commitment to introduce new Films in global markets will ultimately lead to higher sales in profits.

As most of you know, our biggest challenge is overcoming the loss of a large portion of our domestic back sheets business. Over the last three years we have invested more than $1m to support global opportunities for new apetured, elastic and specialty Films. Results thus far while slower to improve than I’d like to see are encouraging. In fact, if you excluded domestic back sheets sales, revenues in Films are continuing to grow. As sales from new product lines continued to gain momentum, we believe Starduct costs will decline and profits should improve.

In our aluminum business, market conditions are likely to improve once the winter months are behind us. If our markets improve with the economy, we should see increasing (inaudible) and profits as we move into Spring.

Finally, you may recall that our last conference call featured Tom Stribling, President of Therics, who talked about Therics and the launch of its initial line of orthopedic products into the growing market for bone graph and substitutes. Those products are being launched now, sales personnel are being trained for a national roll out and we look forward to monitoring Therics’ progress as we move through year.

Before opening it up for questions I’d like to remind everyone that, in addition to the fact that spending is up and business conditions are difficult. We’re also continuing our efforts to control and reduce costs. The actions we’ve taken to date at both division and corporate levels should yield about $30m in annualized savings. I believe our substantial investments in our films business will payoff.

In addition, if our aluminum business improves with the economy and if Therics can demonstrate the benefits of its technology, we can create substantial value for our share holders. I thank you for listening in today and I look forward to answering your questions.

Thank you ladies and gentlemen. If you have a question at this time please press star one on your touch tone 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 speaker phone 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 and one moment please for the first question.

Your first question comes from Andrew O’Connor from Strong Capital. Please proceed with your question.

Andrew O’Connor: Morning Norm, morning Mitsy.

Morning Andrew.

Andrew O’Connor: Wanted to know Norm, can you give me a…more of a sense for how aluminum extrusion orders are trending in the first quarter or how you anticipate them to trend relative to the fourth quarter and the first quarter a year ago?

Sure. Doug Monk is on the line from Newman and he is prepared I hope, to answer that question. Doug?

Let me get my crystal ball out.

Thanks Doug.

So far what we’ve seen is probably equal to the first quarter of last year in bookings, and…but on the other side you know, we are seeing some optimism in the marketplace. But I think what we’ll really see is… if the market is really improving it’ll…probably be somewhere around the end of February or some time into March.

And that’s important again Andrew because what Doug is particularly emphasizing is, we are in the winter months and there is just no avoiding that that is a very specific seasonal issue that’s been with us from day one, so a… I think it’s important to underline what he just said, and that is it’ll be some time in March before we really feel comfortable that we might be able to detect a trend.

Andrew O’Connor: Okay. So at this point first quarter volumes again may be in the mid fifties, mid 50 millions for the first quarter?

Well again, we’re looking so far, we’re seeing is that equal to what we saw in the first quarter last year…

Andrew O’Connor: Okay.

…in January, you know, and our hope is that they get better but you know it’s really… it’s very tough to determine what happens in February.

Andrew O’Connor: Okay, and then can we speak to any strengths or a… can we dissect or better characterize end markets for aluminum extrusion, any strength you’re picking up…upon?

There’s a lot of optimism in the marketplace, but our customer’s long range plan is about a week and a half.

Andrew O’Connor: Sure.

So I mean… but the feedback we’re getting is a lot of optimism and if you read all the economic signals you would hope that we follow with that.

And I guess Doug, it’s fair to say that that feedback that you’re getting is sort of across a bunch of significant business opportunities for us. So it’s not limited to one particular segment of our business. It does run across a few. Is that a fair comment?

I think it’s across the board what we’re seeing… what we’re hearing at the moment so…

Andrew O’Connor: Okay, thanks for that. And then secondly, what film volume would be commensurate with your estimate that first quarter ‘04 profits will be about the same as fourth quarter ’03 profit levels, again for the company’s film business? Thank you.

Okay, I’ll turn that one over to Tom Cochran.

Hi Andrew.

Andrew O’Connor: Tom.

Volumes in the first quarter we don’t see being that significantly different from our volumes in the current quarter.

Andrew O’Connor: Okay, about 68m pounds?

Yeah.

Andrew O’Connor: Thereabouts?

Yeah, thereabouts.

Andrew O’Connor: Okay. And then lastly if I might, Norm you’re suggesting $30m in annualized cost savings in ’04 relative to ’03?

Right.

Andrew O’Connor: Okay, so if we look at the company’s cost margin …

No. I’m not… let me stop on that one. That one, I think is a... Drew can comment on because we’re not saying that we’re going to save $30m more in ’04 than ’03, so Drew why don’t you give some specifics on that.

Yeah. Andrew a large portion of that $30m on cost savings is already included in our historical results. Our goal obviously, is to generate cost savings greater than cost increases that are built into the system, such as labor rates and salaries. There is no guarantee that we‘ll be able to accomplish this goal, but in 2003 for a manufacturing operations on a pro-forma basis, and we realized $30m of cost savings for the entire period our operating profits would have increased by about $5m on a gross basis, $4m net of cost increases.

Andrew O’Connor: Okay.

A lot of that $30m is already in our historical numbers.

Andrew O’Connor: Okay. That’s all I have, thanks very much.

Thank you.

Your next question comes from Ed Letterman, with First Manhattan. Please state your question.

Yeah. Hi and Good morning.

Hey there Ed. How are you?

Good. A couple of questions if I might. First relates to your comment on the capital spending you know. You have invested you said $100m invested aggressively in the film business and you invested aggressively last year.

Right.

But it looks like spending budget is also pretty strong for ’04. You’ve certainly on the film business and combined will be spending more than …a bit more than your depreciation. Actually quite a bit more than your depreciation, and I’m just wondering you know, whether you’re ahead of the curve here before you’ve really seen the benefits and what type of capacity we’ve really built into place here, relative I don’t know you want say your sales or the volumes that you’ve produced, what can see we in see in two years, three years down the road?

That’s an excellent question and I’m going to obviously let Tom answer it, but clearly what you are pointing to is the key. It’s first of all a partial explanation for why our results have not improved to the extent I would like to see them improved. We have spent a significant capital. We’ve built up our depreciation, our new sales have not come in as quickly as I would like so I would answer you -- Tom may say it slightly differently -- but I would answer you to say you’re quiet correct that we have spent ahead of the curve. I think the real question in the future is going to be can we make that up and or are we poised to see a real pay off on the significant expenses for out capital that we have invested. And let me get Tom to give you his answer to that question.

Hey Ed, good morning.

Good Morning.

We have invested a great deal in capital and we’ve had a relatively stable top line for the last three years. Actually the other three sales were below 02 sales in total. And you know from following us we’ve really been, our efforts have been primarily targeted at growth to new customers and growing new product sales to replace the roughly $100m of domestic back sheet business that we’ve lost.

The spending ahead of the curve is always necessary to put in capacity for new products in new regions etc. but there are some indications that give us confidence. If you look at ‘03 growths, excluding domestic back sheet, our volume increased 7%. Revenues were even higher and that volume growth isn’t that much higher than we experienced in the prior two or three years for out put, for volume, excluding domestic back sheet. So we are seeing growth in sales to new customers, we are seeing growth in sales in new products and we feel comfortable and confident in our capital investments.

Well if we look out a couple of years I mean what type of business do we have? One that you know will produce or can produce 350m pounds I mean what’s the number, what’s the range out there in terms of the capacity that you’ll have in place?

Well at this point the growing portion of businesses, our non-domestic back sheet business is about 90% of our overall revenues. And I would like to think that we could continue to grow that growing portion in the mid-high single digit rates. So that would point us to overall revenue growth going forward and that’s what we’re counting on to drive ultimately earnings improvement.

But presumably you have the capacity, that’s a growth rate, I mean so you have the capacity in place or certainly will at the end of 04 to handle that type of growth. We go out beyond ‘04 I mean what kind of spending is going to be required here, should the $40m budget for next year drop to $20m or what do you see happening?

I think the $40m figure in ‘04, I see dropping into the range of $30m going forward from there. That’s very, that can easily change based on if other customers call in and want to accelerate certain programs that number could go higher but under our best guess today to generate the type of revenue growth that I’ve told you, $30m should be sufficient.

Yeah, I would to that at, and I think Tom is very well aware of this that given the aggressive spending that films has enjoyed over the last few years that we will need to see some significant improvement in results before at least I as CEO would be anxious to approve additional significant capital expenditure. So I think we have very clear metrics and milestones in place. I think progress will be made, but I don’t want you to conclude from what you heard that, that sort of spending is a given. We need to show results. I believe we will show results. I know Tom monitors his businesses as specifically as any General Manager can possibly do so. So some of the future spending is going to be necessary come what may, but there is going to be a continuing measurement system and I think probably a very firm application thereof to be sure that those future expenses are warranted and that profitability of some magnitude can return to Films.

My other question is on the Aluminum business. In the release you made reference to a growing presence of Chinese imports in the Aluminum businesses. Is this a secular change that’s taking place in the business and you know what, how do you view this?

Right, no it’s been around for a while but let me ask Doug to give you an answer to that question. Douglas.

Yeah I think the answer is this same answer I gave last time. There is foreign competition that’s coming into the country. It’s not just Chinese. There’s, it’s coming from a few other countries. They do bring some price advantage or have in the past some of that is starting to narrow with the changes. They will take a certain amount of market share, I’m not exactly sure how much that is and what we tried to do is that we tried to focus on the markets where they don’t have any advantage. But they are taking some share out of the total extrusion market.

Is there a market differentiation or is there a product differentiation?

The issue becomes that they can come into certain markets that have standard shapes and high volumes and offer a lower prices though it’s the parts of the market that are in commodities and that’s the part that we try to stay out of.

Thank you very much.

Thank You Ed.

Our nest question comes from Ed Brave for Sterling Capital. Please proceed with your question.

Yeah good morning

Hey Ed, how are you?

Good. Yeah I’d like to pursue this capital spending question a little bit further, how much I guess new capacity have you added with this spending in the last couple of years or would you expect to add let’s say over the three years including 04? Do you have any sense of magnitude you can share?

Sure. Tom would you like to give an overview?

Yes I think that in general it’s a---you can look at our businesses being about 60%-65% utilized in capacity. At the same time that we have been adding capacity, new product lines in Europe and China, new factories in China, new capacities etc. We have also consolidated a great deal of capacity domestically. We’ve closed three plants and we’re in the process of closing a further one. So overall capacity is not shifting it’s just that we’re putting capacity in place with the product that we need for the products that can grow, rather than the products that we’re exiting.

Okay when you think about these investments and your customers think about this magnitude of investment, are these Spec plants or are these plants built with the intention of getting long-term contracts for the pounds produced or are they take or pay arrangements that are long-term in nature? Or did the customers expect you all to build these spec plants and decide later if they want to take large volumes?

It really depends on the nature of the investment. There are certainly several large projects that are, what we’re making exclusive materials and we are the soul provider to certain key customers and in those instances we make the customers bear the capital risk because they are the ultimate determinant of whether this product is successful or not. There are other capital investments where we consider our position in the industry a leading position. We have a host of customers and a very, very broad product offering and we make those investments at our own risk, really a combination of both.

Okay because just looking at it I don’t know if these---if there’s an ability to do this more cheaply in existing plants through new machines in existing plants. I mean the concern here is that we’re watching write off after write off for equipment that was not fully utilized on the old back sheet business and we’re wondering if five years from now we don’t see another potential write off because we’ve done things in sort of Cadillac-like manor, instead of doing things more inexpensively on more test runs, until we really know that we have the volumes. I don’t know your perspective on that?

Yes let me--- Tom will obviously give you details but…and I’m glad you followed through with that because there’re a couple misconceptions that come from what we’ve just said, let me and I know Tom will point the details out but don’t get the impression that each one of these capital expenditures is a new plant. As Tom will tell you many of these capital expenditures are within existing plants and do utilize line or partial assets from lines we already have, so Tom why don’t you put some flesh on that bone.

Yes absolutely Norman. For instance a lot of the new product they were offering are based on technologies that we’ve used for anywhere from 5 to 15 years but we’re adding extra steps. We’re adding additional capabilities to these lines and sometimes the lines have to be in the wrong content and they have to be reallocated moved up graded etc. So it’s not---I think if you look at the types of capital that we’re putting in, we are very, very concerned about investing cost effectively, we understand that putting capital into certain regions of the world requires a higher rate of return and have a higher risk profile than putting capital at home and for those reasons we’ve been through a lot of efforts to try to localize supply, reduce the cost complexity of the capital we’re putting in.

Okay well I guess we’ll look forward to bigger profits out that group in the next couple of years.

Absolutely.

Couple of other quick questions would be and these are more house keeping. Are there any remaining venture capital liabilities or follow-on fundings or are you completely done with that?

We’re completely done. Drew, you may have a little knit or two but I think the fair answer is we’re out of venture capital business.

Yes we are and when we saw the portfolio and the follow-on commitments, they looked the same.

Okay and then the quick one would be with respect to Therics. You’re in the roll-out phase. When…can you share at all the internal budgets on when you’ll be at least cash flow breakeven or operating income breakeven in that unit?

No we’re not. I want Tom’s scribbling to answer further but in terms of forecasting to that degree that is something that we have not done and don’t intend to do because this business is still pretty much in the commercialization start-up mode, so Tom since nobody’s called on you, you might want to give a quick rundown on where things stands and if you have any follow-up after Tom has talked Ed, feel free to do so.

Ok thanks Norm. I don’t have anything to comment on forecasting on revenue or cash flow or profits I will tell you that we have gotten two approvals in 2003 that was previously announced. We are filing some supplemental approvals as we speak. Beginning in January we began to generate sales from a small part of our initial product roll-out. We also have trained, as a matter fact finishing the second training class this week, some outside distributors and we will have trained at the end of this week about a third of our distributors. We plan to finish those training classes about mid-February, so that’s pretty much the status right now.

Okay and Norm just going back to your comments over the last year or so Therics, like mostly see it (break in transmission) the losses can be unlimited and I know your time arriving was a bit shorter than maybe the prior management’s were on making these things work, But is there any conversation about getting outside VC funding and taking some of the ownership right off the table at some point this year as one avenue of value creation?

Not at this time Ed, Tom Stribling is doing exactly what I’ve asked him to do, he has gotten his sales force together. He’s going forward in terms of building a business base. Obviously he’s managing the same way Tom Cochran and that is to metrics and milestones and to the extent that those metrics and milestones are not met we may have to take a different course but for the present we’re doing what we said and that is Tom has presented a business plan to us, he’s operating under that business plan and we will continue to monitor how that operation ensues.

Thank you.

You’re welcome.

Your next question comes from Harden Afay [ph] with Duprints Race & Zollo. Please proceed with your question.

Hi Harden how are you?

Great Norm how are you? My question really goes back to statistic clarification…cost, savings kind of pro-forma figure that Drew gave for ’03, I just want to make sure I understand what you said Drew. That on a pro-forma basis gross savings would have been an incremental $5m to operating profit and net saving would have been an incremental $4m is that right.

That is correct.

So where does this the $30m come from?

The $30m has to – it relates to savings in terms of head count, employees, raw material savings, things of that nature and again a lot of that’s already in our P&L. So when you net it all out, if you want to get to what our pro-forma operating profit would be on a net base you should add $4m.

Okay so cumulatively how much of out of the $30m has already been recognized into your income statement on an annualized basis.

Cumulatively?

Yes.

$25m.

And the – that additional $5m is at a run rate beginning this month your first quarter ’04 or that would be fully incremental in ’04, is that fair?

I think that’s a fair statement but we’ve got challenges in ’04 associated with our new product roll outs and spending ahead of the curve in films.

Okay so on a – maybe you can help me understand how much this kind of investment or start-up cost is impacting films currently?

I think that is something that Harden, we really can’t disclose. It has a lot to do with the special projects that we’re working on for various customers. So I think while we can give you precision in terms of actual cost savings I think it’s fair to say, Tom you may want to add something to this, but I think it’s fair to say that our start up costs are highly dependent on various projects and are not the kind of information that we would be comfortable to disclose. Is that your view?

Yes certainly in total Norm but I think – maybe it just went up a little bit Harden. You know the investment we believe has accelerated to get the capital investments as high as $57m last year. The total impact to our appreciation that we expect in films in ’04 is about $4m. There’s also expenses associated with the start ups, the technical staff that we’ve added in our plants to support these new products. These extra costs are material but they’re not all temporary because we’re always going to be introducing new products. I do expect though that we’re currently spending at a higher percentage of revenue than it’s going to be necessary long-term. And as we go into 2004 the associated revenue and margin growth in these new products will offset that increased spending.

Okay so when I look back and try to make sense of the operating margin in the films business you know from ’01 and ’02, even early ’03, can you help me normalize that for…to exclude the backsheet business? What would have been the operating margin in your films business if you excluded back sheet.

Okay

That you’ve been able to show revenue growth in films excluding back sheets. So I’m trying to understand what should the operating margin be able to return to if this is a fair way to look at it, relative to the margins you’ve been able to produce in the past?

Okay I think I understand what you’re getting at Harden. Our operating margin has declined specifically in 2003 with the dramatic lost of domestic back sheet and the spending ahead of the curve in terms of starting up new products. The operating margin declined to 12%. You know in our past we’ve had peak periods when we actually had margins in the high teens.

Right.

While I see our investments continuing in the near term such to hitting mile stones and making progress of course. And the associated spending necessary to start off these new products, I’m not forecasting any near term immediate improvement in operating margin. But I do expect improvement and whether that’ to high teens to the mid-teens or maybe higher, that’s certainly what we’re trying to achieve. But we’re not projecting any near term immediate improvement in the operating margins.

Okay that’s helpful. Thank you all.

Alright and let me just add one more addendum on cost because you got some precise answers from Drew which are correct. I think we have not emphasized enough on this call the fact that we are scouring the company for other new cost savings that we can put into ’04. That’s true in both films and aluminum so therefore don’t leave this call with the thought that we feel we have taken out all the costs that we possible can. There is a new round going on and hopefully we can give either the next call or somewhere during ’04 an update to the answer to that question.

Okay, thanks Norm.

You’re welcome.

Your next question comes from Andrew O’Connor from Strong Capital. Please proceed with your question.

Andrew O’Connor: Thanks for the follow on question. Drew or Norm maybe to expand on a prior question about margin, I just wanted to know how do you see the company’s operating income margin trending over the next quarter or two. If my math is correct it looks like the operating income margin for the fourth quarter was 5.4% and for the full year 4.1%. Again can you give me a sense for how you see your margin trending for the first and second quarter of ’04? Thanks.

Well – go ahead Drew.

Okay I think Tom answered the question earlier on you really have to do films and aluminum separately.

Andrew O’Connor: Sure.

And then you can combine and I think Tom mentioned the question on margin associated with films. The aluminum business has a lot of operating leverage in it. So the operating leverage right now is roughly 1 to 4. So with volume changes of 1% we would expect profit growth of 4- 5%. And you know so the volume is the key there. You know once you fill your own projection head on buying bases on what Doug said earlier. It should be a little back in the margin based on that.

Andrew O’Connor: Okay fair enough. Thanks Drew.

You’re welcome.

Ms Reynolds there are no further questions.

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

Thank you very much.

Ladies and gentlemen thank you for your participation in today’s conference. This call will be available for replay beginning at 2 o’clock p.m. Eastern Standard Time today through 11:59 p.m. eastern standard time on January 29th. The conference ID number for the replay is 498-3711. Again the conference ID number for the replay is 498-3711. The number to dial for the replay is 1-800-642-1687 or 706-645-9291 for international callers. An archived copy of the web cast will be available for replay on the company’s web site ww.tradegar.com beginning at 2 o’clock p.m. Eastern Standard Time today for approximately two weeks. To listen to the call select Web Cast of Fourth Quarter results link under What’s New on the home page. This concludes the program you may now disconnect.