Tredegar Corp (TG) 2004 Q3 法說會逐字稿

Good morning and welcome to the Tredegar Corporations Third 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 instructions will follow at that time. If you require assistance during the conference, please press "*" "0" on your touchtone phone. As a reminder, this conference call is being recorded.

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

Thank you. Good morning and welcome to our conference call. I'm joined today by Norm Scher, President and Chief Executive Officer, Andrew Edwards, CFO and Treasurer and Tom Cochran, President of Tredegar's Film Products.

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

Before proceeding, 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 31, 2003, 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, both of which are available on our website at tredegar.com. I'll begin with the brief summary of quarterly earnings of our business segments. For those of you who have our press release in front of you, I'm referring to the table on page one.

Third quarter income from continuing operations under GAAP was $15.3 million or 40 cents per share versus $6.4 million or 17 cents in 2003. Results reported under GAAP include a variety of special items that are explained in the press release. From this point on and unless otherwise noted the comments we are making in today's call refer to third quarter results from continuing operations, excluding special items.

Third quarter income from manufacturing operations was $9.9 million or 26 cents per share which is up 6% over $9.3 million or 24 cents in 2003. Net sales for manufacturing operations rose 15% to $216.7 million. Sales and profits in both films, products, and aluminum extrusions were up versus last year. In film products sales rose 13% to 104.6 million, operating profit from ongoing operations was up 2% to 11 million and volume in films was up 3%.

In aluminum extrusions sales rose 17% to 112.1 million. Operating profit from ongoing operations increased 14% to 7.4 million, volume was 3%. Finally, our Therics subsidiary had a $2.2 million operating loss from ongoing operations, compared to a loss of 2.6 million in 2003. This translates to an after tax loss of 1.4 million or 4 cents per share versus a loss of 1.7 million or 4 cents last year. I will now turn it over to our CEO, Norm Scher. Norm.

Thanks Mitzi and good morning everyone. Thanks for listening in. As Mitzi pointed out sales and profits were up in film and aluminum and we are continuing to make progress in both units. However, overall performance has been adversely affected by several issues or events that I will describe in a moment. In film product profits were up slightly, despite substantially higher resin prices. During last quarters call we said this business was improving on several fronts and we thought we were getting close to realizing a pay-off on the substantial investments we have made in recent years. However, the continuing escalation of resin prices would limit our ability to achieve significantly higher profits in the near term.

Our new product introductions and global initiatives are going well. But, given the prospect of the even higher resin cost we expect profit growth to be more gradual as we move through 2005. Resin prices have been increasing steadily since early 2002 and the increase is accelerated in recent months. We estimate that the negative impact of higher resin cost was $1-2 million in the third quarter. Unfortunately, the outlook is for more of the same. We do have pass through or of course cost sharing agreements with the majority of our customers but in some cases the higher costs are not passed through for an average period of about 90 days. In a rising cost environment which we have had for almost 3 years this lag puts constant pressures on the margins and profits. Looking beyond the current issue with resin prices, I want to reiterate our confidence in the longer-term growth prospects for films.

Sales and profits of new apertured elastic and specialty films are continuing to grow steadily. During our last call we said that the success of P&G's new feminine pad topsheet in Europe and Japan is leading to new opportunities in other regions and that we are expanding production capacity in anticipation of those opportunities. I am pleased to report The Procter & Gamble will soon begin promoting the introduction of this new topsheet in North America. We also announced recently that we are moving the films, research and development, and technical centers at Richmond, Virginia where they will be co-located with our R&D, sales and mark [ph]. This move should result in shorter product development times and reduced annual operating expenses by approximately $2 million. We will continue to look for similar opportunities to improve performance and reduce cost.

Moving to Aluminum Extrusions, profits were up 14% on a volume increase of only 2%. Profits from higher selling prices and higher volume were partially offset by about $1.5 million relating primarily to unexpected furnace repairs and the continuing appreciation of the Canadian dollar. Our results so far this year illustrate the benefits of operating leverage and pricing improvements when volume has [grown]. For example over the last 12 months volume is up about by 5% over the same period profits are up about 35%. At current operating levels we expect operating leverage at 3-4 times percentage volume growth. As we enter the seasonally weak winter months, market conditions continue to be more favorable than they were last year. At this point, our backlog of orders is ahead of last year and our pricing is more favorable as well. If these conditions persist as most industry measures predict, we hope to continue generating higher year-over-year profits. That’s a quick summary of our manufacturing operations. Before opening it up for questions I will close by reminding you that last year at this time we committed to funding FedEx through at least end of 2004 and we are continuing to monitor its progress very closely. We will provide an update with the release of fourth quarter earnings. Thanks again for listening in today, now let's open it up for questions.

Thank you ladies and gentlemen. If you have a question at this time please press "*" "1' on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue please press the "#" key. 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 "*" "1" on your touchtone telephone. One moment please for the first question. Your first question is coming from Joshua Fen (phonetic) of Gabelli Asset Management.

Good morning.

Hi, Joshua good morning.

How are you? Pretty good numbers despite of the resin pressure. On the 90 day lag will that be a benefit if prices start to go down because there is a cost sharing go both ways?

Yeah let me for elaboration let me ask Tom Cochran who is President of our Films Division to give you a fuller answer.

The quick answer is yes, we do benefit from decline also. The issue that we are facing right now though is that resins have been increasing consistently for almost three years and we expect more of the same. But if and when it turns we will benefit [and decline].

Okay, I appreciate it, that’s all I had.

Thanks.

Thank you. Your next question is from Louis Sapphire (phonetic) of Oppenheimer. Please go ahead.

Can you give us any idea when Therics might be in the break-even mode?

Louis I am going to be very consistent here, we are going to announce with our fourth quarter earnings, our next steps with Therics and until we made that announcement that’s really all that we can tell you today.

Thank you.

You welcome.

Once again ladies and gentlemen if you do have a question at this time you may press "*" "1" on your touchtone telephone. Your next question is coming from Timothy Hayes (phonetic) of BB&T Capital Market.

Hi, Tim how are you?

Good and thank you. Good morning. I had a question on the aluminum extrusions business. We do a calculation and we will take your unit revenue and then subtract out the U.S. aluminum price and when we make that calculation we see a decrease in that spread from Q2-Q3 which is a bit puzzling to us, we figure that, that spread would widen given that there were two price increases announced in Q2, just wondered if you could elaborate on that for us please?

Andrew would you like to respond.

Yeah, as you know Tim the price increase. We did announce price increase in April, another price increase was announced for bill of charge effected in September and these price increases have been phased in according with contractual agreements that we have with customers. So, we did get a benefit in the third quarter as well as there was a benefit in the second quarter for those price increases. But in the third quarter as you know from our press release we did have some additional cost that were un foreseen, the Canadian dollar appreciation as well as repair to a furnace and then in Georgia and the other thing I would like to indicate is that our cost, you know, profitability can be somewhat volatile from quarter-to-quarter and while pretty much everything seem to go right from a cost perspective in the second quarter we did have hiccups in the third quarter.

I guess the follow-on question was some of the issues that were cost related shouldn't -- wouldn’t be picked by that spread, the spread would widen [inaudible] even if you had cost issues?

There are other things like mix that affect that number too Tim, that is probably driving your differential.

Okay. Thank you.

Thanks.

Thank you. Your next question is a follow-up coming from Joshua Fen (phonetic) Gabelli Asset Management.

Hi, just a -- I know you talked about last couple of quarters I just ask question again, you know, where do you guys stand on stock buy-back and the dividend, and returning you know using cash, excess cash?

Right, we clearly are making a lot of excess cash but we have a lead [ph] right now that is pretty clear in our mind anyway to support our film efforts as they grow and also to look at other prospects that we might be having. So, for the time being Joshua we are not looking at a stock buy-back. We always discuss with our board the possibility of increasing dividends but at current we are primarily looking at having ample opportunity to fund our existing businesses.

How about CapEx, have you guys talked about that publicly yet.

I don’t think we said anything yet specifically about that, have we Andrew.

No, not about 2005 but we have for 2004 films in the $50 million range and aluminium around $15 million.

So the same are down in '05, can you give me that general?

Not yet, we will put that out with our fourth quarter announcements. So I think it is premature for us to say anything more at this time.

Okay, thanks.

You are welcome.

As a final reminder if there are any further questions at this time you may press "*" "1" on your touchtone telephone. Your next question is coming from Rob Norfleet of Davenport & Co.

Hey, Rob, how are you doing?

Great. How are you doing?

Good.

I just had a quick question, obviously clearly with the acceleration and resin prices over the last quarter, you know, effected profits, that I guess going back over -- you mentioned this has been a problem since '02, clearly it been accelerating maybe even hyper inflation in raw material pricing, but just from an apple-to-apple prospective, if we were to look at the effective higher resin prices that had on films as it relates to operating income, is there a number we could look at sequentially, first quarter or second quarter just so -- you know, I'm looking at this third quarter you said $1 million to $2 million spread, obviously there was some impact in the second quarter and the first quarter that we didn't articulate previously, is that something that you calculated?

Let me get Tom to give you an answer. I don't think he can be precise, but I think he can give you some sort of general response to what you are asking?

Rob, the reason we made the disclosure here in the third quarter result is that the third quarter was particularly significant and I think it's important that we get that information out there, because of the expected impact on coming quarter results. Resin prices which, you know, are partially driven by world energy prices have been increasing since early 2002 with only a few brief periods of declines. Usually because of our pass through arrangements with the majority of customers and the volatility of 1 cents or 2 cents a pound a quarter, which we saw in the first half of the year doesn't have that significant an impact on our quarterly operating profit but a big change in resin like you saw this quarter can have a more significant impact. So, the increase during the third quarter was more substantial, current prices are at recent record levels, and we expect further increases frankly. So, for that reason we thought it was important to quantify third quarter impact.

Okay, that makes sense. Thank you all.

Thank you.

Ms. Reynold there are no further question at this time.

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

Thanks folks.

Thanks

Ladies and gentlemen, thank you for your participation in today's conference. This call will be available for replay beginning at 2:00 PM Eastern Day Light time today through 11.59 PM Eastern Day Light time on October 28. The conference ID number for the replay is 5215176. Again the conference ID number for the replay is 5215176. The number to dial for the replay is 877-519-4471 or 973-341-3080 for international callers. An archived copy of the webcast will be available for the replay on the Company's website www.tredegar.com beginning at 2.00 PM Eastern Day Light time today. To listen to the call select the webcast of the third quarter results link from the home page. This concludes the program you may now disconnect.