Tredegar Corp (TG) 2004 Q4 法說會逐字稿

Good morning and welcome to the Tredegar Corporation fourth-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. (OPERATOR INSTRUCTIONS). As a reminder, this call 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 begin your conference.

Thank you. Good morning and welcome to our conference call. I am joined today by Norm Scher President and CEO, Drew Edwards, CFO and Treasurer and Tom Cochran, President of Tredegar Film Products.

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

Before proceeding we offer the following cautionary statement. The comments we make today in response 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 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 will begin with a brief summary of quarterly earnings by business segment. For those of you who have our press release in front of you, I'm referring to the table on page 1. Fourth quarter income from continuing operations under GAAP was 3.4 million or 9 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, unless otherwise noted, the comments we're making in today's call refer to fourth quarter results from continuing operations, excluding special items.

Fourth-quarter income from manufacturing operations was 6.5 million or 17 cents per share, up 7 percent over 6.1 million or 16 cents in 2003. Sales rose about 25 percent to 227 million. Quarterly sales and profits in both film products and aluminum extrusions were up over last year's fourth quarter.

In film products, sales rose 22 percent to 111.3 million. Operating profit from ongoing operations was up 6 percent to 11.4 million. Volume in films was up 6 percent on a pro forma basis, which excludes results from divested operations. In aluminum extrusions sales rose 27 percent to 108.9 million, while operating profits from ongoing operations increased 32 percent to 3.3 million. Volume was up 10 percent.

Finally our Therics subsidiary had a 2.5 million operating loss from ongoing operations compared to a loss of 2.4 million in 2003. This translates to an after-tax loss of 1.6 million or 4 cents per share for both periods.

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

Thanks Mitzi. And good morning everyone and thanks for listening in. Before commenting on fourth quarter issues, I want to talk for a minute about the solid progress we made during 2004. Full year sales from manufacturing operations were up 17 percent, while earnings increased 11 percent. The 50 percent profit improvement in aluminum is a strong indication that we are on the right track in that business. And more on that in a few minutes.

Unfortunately, while we continue to see improvement in sales and profits associated with new products, year-over-year profits in films declined primarily due to rapid and steep increases in resin prices that were particularly acute in the fourth quarter. When you look below the surface in films you will see that we have replaced over $100 million in loss backsheet sales. We're now focused on selling higher value aperture elastic and specialty film. And we're gaining momentum in each of these areas. The point I want to make is that we believe that both films and aluminum are substantially stronger businesses today than they were at this time a year ago.

Now let's skip back to the fourth quarter. I will start with films where profits were up slightly despite a 16 percent increase in resin prices in the fourth quarter. And that was on top of a 9 percent increase that took effect during the third quarter. Although we feel this business is improving on several fronts, the steep escalation of resin prices over such a short period is limiting our ability to achieve higher profits. In fact, we estimate that the fourth quarter resin increase alone had a negative impact of about $2 million on fourth quarter profits. We are responding with appropriate price increases.

Looking beyond the current issue with resin prices, we remain optimistic about our growth opportunities in this business. As I said earlier, sales and profits of new aperture elastic and specialty films are gaining momentum. And we continue to expect 2005 profits to exceed the 2004 levels.

Moving to aluminum extrusions, fourth quarter profits were up 32 percent on a volume increase of 10 percent. The improved results from volume growth, higher selling prices and cost reductions were partially offset by the continuing appreciation of the Canadian dollar. When you take seasonality out of the equation by looking at a aluminum results for the full year, you can really see the benefits of pricing improvements and operating leverage when volume is growing.

In fact, on a year-over-year basis, profits in aluminum grew by 50 percent on a volume increase of only 7 percent. At current operating levels for every 1 percent increase in our annual volume, we expect a corresponding operating profit increase of about 3 to 4 percent.

That's a quick summary of our manufacturing operations. And I would like to close with a brief comment on the status of our development and marketing efforts at Therics. You may recall that Therics launched its initial product line in April of last year. Since then, the feedback we have gotten from surgeons and others in the marketplace has been positive, but our sales and marketing results are evolving more slowly than we had originally hoped.

We're working with selected surgeons and using patient-based case studies to help us evaluate and improve existing products and develop more advanced product line extensions. We are actively exploring collaborations with other companies that we believe will expand our market reach. We continue to believe that our technology has value creation potential.

On the expense side of things we recently took steps that will reduce the burn rate by about $500,000 per quarter. And we will continue to look for additional opportunities to reduce costs. We will provide more specific details on our progress when we release first-quarter earnings in April.

Thanks again for listening in today. Now, let's open it up for questions

(OPERATOR INSTRUCTIONS). Josh Fenton with Gabelli Asset Management.

Just talk a little bit about -- I know you talked about this in last quarter, just review for us the pass-through time lag on resin prices, and what you guys are doing right now?

Sure, I'm going to turn that over to Tom Cochran.

I think we talked about that several times. In general we have pass-through agreements of two-thirds of our customers. And those pass-throughs are on based on a variety of mechanisms. The other 35 percent is subject to basic market issues. And we are presently in the process of raising prices to that percentage.

And the lag with them is roughly?

Those are not contracted, so it varies by every piece of business.

So as those orders come in you can adjust in real time sort of?

Sometimes.

As orders come in you can adjust pricing?

With most of our customers, pretty well. We generally give them some notice.

Louis Safire with Oppenheimer.

Can you give us some guidance on what you can foresee as possible earnings this year, or what Wall Street thinks you can earn this year?

Louis, we have not given any precision in guidance for year-to-year earnings, and really won't do it here today. What we have said is that believe that our business in both films and aluminum is solid. And that the big watch out in films is what Tom Cochran just talked about, and that is resin prices and our ability to offset those increases. But we do feel that the fundamentals of our films business is and are improving. And in aluminum if the economy continues to improve, and we continue to be able to gain business in areas that our margins are better, aluminum should also continue to improve.

So that is the best general guidance we can give you. And that is at this time we believe 2005 should be better than 2004 in both of our businesses, subject to what I just said.

How about any larger customer base for your films business?

Are we building a larger customer base? Let me ask Tom to respond to that.

We are building a larger customer base. We are doing it in 2 areas. The first area is in personal care where we really operate a global business that sells to market leaders in the feminine hygiene, baby diaper and adult diaper businesses. We are also moving into some similar businesses, but like wipes and protective apparel that are very similar -- similar materials are used.

In addition to that we have a business called Performance Films that is expanding into specialty food packaging and surface protection films. And they are also adding new customers.

(OPERATOR INSTRUCTIONS) Matthew Nagel with Templeton.

Yes, I apologize if you discussed this earlier, but I was on the call a little bit late. What was the main driver of the decline in aluminum margins for the quarter?

Matthew, I'm going to ask Drew Edwards to answer that.

The main reason for that decline is the fourth quarter is a seasonal low for us. So the operating leverage in that business is fairly significant, so when you move into a seasonal low, you've got the same amount of fixed cost. And that just results in the math of your margin decline.

Any impact from the weak U.S. dollar.

There was an impact. If you look at the fourth quarter of this year compared to the fourth quarter of last year, the improvement of the Canadian dollar relative to the U.S. dollar had an adverse impact on the operating profits of that business in the 2 to $300,000 range.

In what month -- I know resin prices is the wild card that you mentioned before. In a stable oil environment -- a stable oil price environment, what might these margins look like in '05?

You're obviously now talking about our films business. Let me turn that over to Tom Cochran and let him respond.

Well if you look at the way resin prices have increased over the past few years, and the fact that over time it works its way into our selling prices, that has accounted for about 3 percent of our operating margin decline since 2001, 2002. So in a stable environment we would be looking at higher margins. But from where we're looking today we don't expect declining resin prices going forward, at least any time in the near term.

Even if oil is stable, would you still expect resin prices to move up?

Well, oil is a driver in North America. Natural gas prices are even closer. But this is also tied to capacity at various stages in resin production cycle. Ethylene for instance, propylene -- and then our cracker (ph) capacity for polyethylene to polypropylene. So it is influenced by a lot of different things. Natural gas is the primary raw material that affects our North American supply.

So even if natural gas prices are stable here, you're going to see pressure on your resin prices due to tight capacity?

I think so.

Robert Longnecker with Barrington.

Could you guys just give a little more color on strengths and weaknesses in the extrusion business, both in terms of geographic location and in terms of segments of the commercial building sector?

Sure, Drew, would you like to elaborate there.

From a geographic perspective, most of our extrusions are sold east of the Rocky Mountains. I'm going to go by segment here. For residential construction volume, which comprises about 20 percent of our business, it grew about 1.7 percent for the year. The industry probably grew about 4 percent there. We lost some business in tub and shower enclosures to the Chinese, and small domestic extruders due to price. We have seen softer demand in that sector recently, and its growth trends will likely depend on the level of mortgage rates.

For non residential construction volume, which is the largest single component of their business, it comprises about 40 percent of overall volume, that grew about 7.5 percent in 2004. We saw particularly good growth in store front and curtain wall extrusions. External forecasts showed growth in that sector at about 5 percent or greater over the next couple of years. But this will likely depend on vacancy rates dropping from the midteens where they are today to the 10 percent range where we saw good growth in the late '90s.

The distribution sector is about 13 percent of our total volume, that grew about 1 percent this year. Distribution of lower margin standard and industrial shapes were down partially from foreign competition. We are emphasizing there custom extrusions. For example, hurricane shutters, which are custom systems, are higher margin products for us. We expect hurricane shutter growth to continue into 2005 due to hurricane repairs and prevention.

Machinery and equipment was up for us this year. That is primarily because of agricultural sector growth for extrusions. And transportation, there was good growth in truck-trailer, but we are a small player there. And automotive we expect that's probably will be flat in the coming year.

Is your residential -- what percentage of that is new and what percentage of that is renovation?

Most of that is -- if you look historically most of residential, probably 70 percent, is in fact new.

Can you just speak a little bit more to the threat from China and whether that is across all of your segments, and whether you view that as kind of a growing threat going forward?

Currently the China threat is about 10 to 15 percent of our volume. We estimate that they have 4 percent overall market share in the U.S. at this point. But you know we feel like about 10 to 15 percent of our overall volume is what is exposed. And that is primarily in the area of standard shapes where the lead time issues that they have are not a problem.

And what about -- I know you're a small player in kind of truck-trailer, but is that an area where growth -- I know that slowed down a little bit. Are you guys experiencing that or do you think it will remain strong?

We think it will remain strong, but we are emphasizing truck-trailer in our business. It's a very volatile sector.

It's about as volatile as it gets.

Yes.

(OPERATOR INSTRUCTIONS) Rob Norfleet with Davenport & Co.

Hey, just a quick question. I guess for Tom. Could you maybe spend a couple of minutes talking about -- in 2005 I know you discussed allocating $50 million in capital towards projects in the films area. Can you kind of discuss where that money is going in terms of some of the new products and some of the roll outs we can expect in 2005? And clearly I think in the release you'd even mentioned a new customer that you're working -- that you are working with with some new products.

Well, capital expenditures in this business have been pretty high, Rob, 57 million in 2003. 2004 came in a little bit lower than we had told you earlier, at about 45 million. And most of that spending -- and also in 2005, the 50 million that we are projecting is going into new production lines in Europe and in Asia, and some domestically. Most of our investments are related to new top sheet materials for sanitary napkins, elastic laminates for diapers, reusable films for personal care applications for protective apparel, our new plant in Guangzhou, China, and some new specialty materials -- specialty packaging material and surface protection films. We are also installing a new integrated financial system.

So all of that is included in that 50 million expectation for next year. Specifically we have highlighted a contract that we have for a $10 million line for SCA. That is designed to enhance the fit of absorptive products. I think fit is really our way of describing elastic laminates and the kinds of better more clothing-like fit for garments.

Okay, great. Quickly, I noticed, and you all cited this in the release, that although you were adversely impacted by obviously $2 million in higher resin prices, it is partially offset by that $1 million reimbursement that you received for start up costs for a customer. Do we have any additional reimbursements that we should expect to receive during 2005?

No.

I guess quickly, Drew, in terms of capital structure would we expect this year -- obviously we have been paying off some long-term debt -- what would you say in terms of optimal capital structures when we look in the year and uses for free cash flow?

We have still got the CapEx spending programs going on in films, so I would expect we would see negative cash flow for the first half of the year. And then when some of the capital spending is behind us for films, we would start to move back into a positive cash flow range. But I would expect that our debt, or net debt will increase somewhat in the first half of the year because of those programs in films.

Any change in the effective tax rate in that?

The overall effective tax rate for the year came out about around 36 percent. At this point, I would use that for manufacturing operations in your model for 2005. I would use 35 percent for Therics.

(OPERATOR INSTRUCTIONS). Ms. Reynolds, there no further questions.

Okay, this is Mitzi Reynolds, I want to thank everyone for participating in our call today. We look forward to updating you in April.

Ladies and gentlemen, thank you for your participation in today's conference. This call will be available for replay beginning at 2 PM Eastern standard time today through 11:59 PM Eastern standard time on February 3. The conference ID number for the replay is 5578216. Again, the conference ID number for the replay is 5578216.

The number to dial in for the replay is 877-519-4471 or 973-341-3080 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 PM Eastern standard time today. To listen to the call, select the webcast of fourth-quarter results link on the home page. This concludes the program, you may now disconnect.