Tredegar Corp (TG) 2005 Q1 法說會逐字稿

Good morning and welcome to the Tredegar First Quarter Earnings Conference Call. At this time, 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).

I would now like to introduce Mitzi Reynolds(ph), 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 by Norm Scher, President, and Chief Executive Officer; Drew Edwards, CFO and Treasurer; and Nancy Taylor, Senior Vice President, and 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 and Nancy will 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 responsive 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 2004, which is on file with the SEC.

In an effort to provide useful information through investors, our comments today also include non-GAAP financial measures. For details on these measures including, why we employ them and the reconciliation to comparable GAAP measures, please refer to

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You may resume. Start again.

Okay. This is Mitzi Reynolds, again. I apologize we had some technical difficulties. So, we are going to start this call from the top, and again I apologize for any inconvenience here. Okay.

Welcome to our Conference Call for First Quarter Earnings. Today, I am joined by Norm Scher, our President, and CEO, Drew Edwards, our CFO and Treasurer, and Nancy Taylor, Senior Vice President, and President of Tredegar Film Product.

Here is the agenda for today's call. I will give a brief review of yesterday's earning. Norm and Nancy will 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 responsive to your questions may contain forward-looking statement. Information concerning factors that could cause actual result 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, 2004 which is on file with the SEC. In an effort to provide useful information for 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 in the Form 8-K that is being furnished to the SEC. Those of which are available on our website at http://www.tredegar.com.

I will begin with a brief summary of quarterly earnings by business statement. For those of you who have our press release in front of you, I am referring to the table on page 1.

First quarter income from continued operations under GAAP was $5.6 million or $0.14 per share, versus $2.4 million or $0.06 per share. Results reported under GAAP include a variety of special items that were explained in the press release.

From this point on, unless otherwise noted, the comments we are making in today's call was for the first quarter results from continuing operations, excluding special items.

First quarter income from manufacturing operations was $6.7 million or $0.17 per share, down slightly from $7 million or $0.18 in 2004. Net sales from manufacturing operations were at 19% to $226.7 million. Sales in both film products and aluminum extrusions were up over last year.

In films, sales rose 22% to $116.7 million while operating profit from ongoing operations was up 16% to $11.6 million. Volume was down slightly.

In Aluminum, sales rose 16% to $110 million. Operating profit from ongoing operations declined 19% to $3 million. Volume was relatively flat.

Our Therics subsidiary had a 1 million operating loss from ongoing operations, compared to a loss of $2.5 million last year. This translates to an after tax loss of $1.2 million, or $0.03 per share versus a loss of $1.6 million, or $0.04 in 2004. I'll now turn it over to our CEO, Norman Scher, Norm.

Thanks Mitzi. And good morning everyone, we appreciate your listening in. I want to start out by welcoming our Sr. Vice President, Nancy Taylor to this call. Nancy was named President of Tredegar Film Products earlier this month, after spending most the last two years as Managing Director of European Operations for films.

We are very excited about having Nancy back in Richmond, and look forward to helping her lead films to a new level of profitability. Given that Nancy is joining us for the first time today, we are going to make a slight change to the usual way we've conducted these calls in the past.

Instead of starting off with films, I'm going to cover Aluminum and Therics first, and finish with films. And Nancy will follow with some brief comments before we open it up for questions.

As Mitzi pointed out, first quarter results from manufacturing operations were mixed, with profit growth in films offset by profit decline in Aluminum. We continue to expect 2005 profits in both units to exceed last year's levels.

In Aluminum, first quarters profits were down primarily due to the continuing appreciation of the Canadian dollar, and higher energy and distribution costs. Together, these factors had a negative impact of about $2 million. I think you all know that winter is the slow period in the aluminum extrusions industry, with business traditionally gaining strength in the warmer spring and summer months.

As we began the second quarter, conditions in most of our key markets appear to be relatively healthy, for example, recent sales of extrusions used in hurricane shutters, commercial construction, and machinery and equipment markets have been strong.

On the other hand, we are seeing less demand for extrusion used in residential, and other markets. At this point, we continue to believe the 2005 profits in aluminum will surpass 2004 levels.

Our current backlog is ahead of last year, pricing is more favorable and recent customer orders have been relatively strong. It's important to remember that a current operated levels for every 1% increase in there annual volume, we expect corresponding operated profit increase of about 3 or 4%. At Therics, there is not much to report beyond our success at lowering the burn rate. Sales continue to lag internal expectations, and as a result Therics is continuing to explore potential collaborations with other companies aimed at accelerating market penetration across a broader array of market segments.

Moving on to films, profits we up 16% due primarily to continued growth in new apetures (ph), elastic, and specialty product. Profits also were up on a sequential basis. In fact, if you exclude a fourth quarter reimbursement of $1 million for startup cost that we incurred earlier in 2004, profits were up about 12% since the end of the fourth quarter.

It's particularly gratifying to note that the improvement in the both year-over-year and sequential results was achieved despite higher rising cost which have been rising for almost three years. Before turning it over to Nancy, I want to give a quick update on the resin issue. We talked about that issue in great detail last quarter, and we covered that issue again in our press release. Last quarter we said that if resin prices continue to rise at the rate that outstrips our ability to absorb them quickly, either by raising prices or by direct tax through the customers, it would be difficult to achieve significant neat term profit growth, this is still true.

However, we assume resin prices appear to have been stabilized. In summary, we remain optimistic about our growth opportunities in films. Sales of new products are gaining momentum. Resin at least for the time being, seems to have stabilized, and we continue to expect 2005 profits to exceed 2004 levels. I will now turn it over to Nancy for some additional comments on the films business, Nancy.

Thanks Norm. Good morning. Norm covered the highlights for the quarter for film, so I simply want to echo his optimism about the future. I am truly energized by the opportunities we have to take films to new levels of customer focus, profit, product innovation and most important profitability.

I just returned from an important industry trade show in Geneva, and I came away even more excited about the global prospects for this business. My charge as President of Film Products is to accelerate profit growth, and create value for our shareholders. I believe we are well positioned to meet these objectives.

Many of the pieces are ready in place. We've a broad product line, first-rate technology, a global customer base, and the infrastructure to support it. We plan to intensify our customer focus, leverage further on marketing strength, and increase our efforts to accelerate product innovation. Last but certainly not least, we will continue to focus on reducing costs throughout the business.

Tredegar has invested a significant amount of capital on film products over the last few years, and must deliver a better return on that investment. Our investment in new products such as P&G's new feminine pad pouch top sheet, and new material for STA's personal products, are particular promising sources of incremental profit growth.

I also note to know that about 1/3 of the capital spent in 2003 and 2004, and what we plan to spend in 2005, relate to customers specific opportunities that are covered by capital indemnification, contractual volume commitment, or similar arrangements.

The expenditures that are not so protected also were represent further upside potential. A good example is our investment in additional capacity for surface protection film. I look forward to updating you on these, and other new growth opportunities in upcoming quarter. I'll now turn it back over to Norman.

Thanks Nancy. Now, let's open it up for questions.

Thank you.

[Operator Instructions]

The first question comes from Rob Longnecker (ph) of Barrington. Please proceed with your question.

It's actually Rob Longnecker, but you can't always get the name right. Just quick questions, for you guys on the extrusion side, clearly -- it's a weak quarter, if you guys but it looks like volume was flat year-over-year. Can you talk a little bit about kind of what was behind that a little bit more in detail? And maybe even give some color on what that volume were to look like if you haven't had the hurricane business?

Sure. Rob, let me ask Drew Edwards to give you response on that.

Okay.

Rob, shipments for the quarter were up 0.7% during the first quarter, compared with the first quarter of '04. Nonresidential building constructions, which is about 40% of our overall volume, grew for the quarter, and is expected to continue to grow for the year. External poor cash of growth in this sector 6% are greyer for the next couple of years, but this will likely depend on vacancy rates dropping from the mid teens today to the 10% range, where we saw a good growth in the late 90s. And volume in residential construction, which is our second largest market at around 20% of total volume is down over last year primarily due to two factors.

First, one of their large customers in this sector was acquired by a company within an house extrusion capacity. And so we lost that business on the captive basis.

And secondly, we have lost business in tub and shower sector to Johnny's, and smaller extruders primarily due to price. Otherwise, we've generally held around share in this sector. Their volume to distributors grew significantly, as you mentioned, as a result of hurricane related products. We expect this to continue for most of the year.

In transportation, auto and like truck, which is the biggest component of this sector, is expected to be flat or down based on current forecast of auto production. And in machinery and equipment, we are seeing good growth particularly for extrusion used in industrial and agricultural sectors. Hurricane shutters was a big driver behind the volume growth for the quarter, and if we had in hand that prior as to the residential construction decline, we would have seen volume drop.

And can you comment on who that customer was that was acquired?

No, we are not going to mention that name.

Okay. Why were you saying that it look like, if that -- if he kind of script that customer out, I'm just trying to get a feel for kind of the underlying mist?

If you script out that customer, as well as the tub and shower lost market share again, the residential would have held it's own.

Okay. I've got a question on films as well, is that okay or do you want me to get back in queue?

No. Go ahead, Rob.

Okay. Can you also, just give a little bit more color on your basis of growth is new apertured elastic and specialty products. Can you give a little more color on, are these new customers, or new products of the existing customers, or new geographies or what's driving that?

Okay, Nancy.

It's all the above. We do have new products for existing customers, we're continuing to expand our customer base and we are also continuing to expand into new geographies.

Okay. I will get back in queue. Thank you.

Thanks.

Thank you. Ms. Reynolds, there appears to be no further questions.

Okay.

Rob, as you want to come out of queue and have another question, go ahead.

Actually we just had someone new to join the question and we have Ed Ruffman (ph) from First Manhattan.

Hi.

Yes. Hi, good morning. I just have a question on the films business, I mean, the reference was to the spending -- you know, that's been done historically, and in fact that you're continuing to spend aggressively. You know, this is another year, where you're going to the spending a heck of a lot more than the depreciation.

And we still haven't -- you know, and there is recognition of the fact that haven't had the returns in the business on what you've been spending. Just wondering, if you get beyond '05, I mean, is this a business that you're going to continue to consume capital at the rate that's been consuming in recent years?

Yes, I'm going to let Nancy answer that, but I'm going to give a little bit of a global response to that question. We are trying to do a better job, and Nancy said it in her statement to illustrate, to use a difference between a lot of capital that we spend with customer involvement which gives us great comfort that -- that capital is being properly utilized and will return decent returns to us, versus capital that has been spent without the benefit of a very specific customer base.

So, I would ask Nancy, if she answers the question, maybe to repeat that because I think the more we can say about that the clearer our scenario becomes, to make you and others. And then I would also like Nancy to comment on one of her favorite subjects, and one that I join her in, and that is opportunities to spend much lower cost capital in different areas of this world that we have not only explored but are getting into to give you a comfort level, because you're right, this question has gone on for 2 or 3 years.

The explanation we think, is becoming, or should be becoming clearer, but apparently we haven't made the point. And this is Nancy's first time with that, and, Nancy, I commend you to take a shot at that and give your own answer.

And as I mentioned in my comments, about 1/3 of the capital we have spent over the las couple of yearshas been spent in connection with a customer specific opportunity, and so there is some protection on that capital. We understand the trend you commented on, and we are focused on it. We do believe that we are going to see the revenue and the margin growth coming, that will justify that spending but, we do expect that we will continue to have capital spending for new products but as Norm alluded to we are excited about opportunities to lower the capital required to bring on new products.

We have been present in China for 10 years now, and we are starting to leverage our presence there, and looking at opportunities for lower cost equipment. And, we believe that that will in fact help us reduce and change the trend that we've been seeing over the last couple of years.

Let me add a couple of things to that, Nancy. If you look at last year, and you look at real growth, we had real growth in sales, about 9% in film products, driven by our growth in elastics, apperture time piece films, and surface protection films, and we would hope that we'd see similar growth maybe this year.

And after that growth is driven by the capital spending, the $100 million that we spent the last two years, plus the expected additional $55 million this year. Also, if you carve out capital Ed, between - indemnify or covered by take-or-pay contracts in the normal capital expenditures that we need to operate the business. You are looking at about $35 million annually on an ongoing basis versus the 50 to $60 million that we spend on the average over the last couple of years.

One other comment to and that is a goodly chunk of capital is now being allocated to our global information system, which we need, and we must have gross of -- part of that number is masked a bit by the need to have infrastructure to be a globally competitive company.

And are you -- Drew, are you saying that the maintenance spending for this business is 35 million?

Yes. But I wouldn't call that necessarily just maintenance. There's a amount after annual strategic capital, you got to spend in this business to bring on line new products and to surf a growth.

So, as you drive the business over the next couple of years, I mean, you have -- you're not suggesting that the spending is going to come down a whole lot from the $55 million. You know, maybe -- I don't know, what are you're saying $10 million or something?

Well, we would expect that the capital spending to be in the $35 million range annually unless, we had specific customer opportunities like we've had in the past. Collaborations, that has driven a big chunk, as Nancy mentioned over the last three years, about 50 or $150 million was specifically related to joint projects with customers.

Okay. Well, as you say, still have a lot to do to drive the earnings of this business to get a return?

Yes, absolutely. And one other thing we haven't talked about, but one of the things has prevented, some profit growth has been the higher ressin cost, which we've talked about in our last couple of press releases, really hurt us in the 3rd and 4th quarter of last year. And we haven't seen all the recovery of that, at this point.

Thanks.

Thanks, Ed.

Thank you. We do have a question from Tim Hayes of BB&T.

Hi, good morning.

Good morning.

On the aluminum side, I saw the reference that you made on the announcement of the price increase in April, could you quantify that, and I'm assuming that's on conversion prices?

Yes, Drew do you wanna give a general answer on that, not as specific because we have not gotten specific, nor we do intend to get specific on the details of any pricing, for instance.

That price increase, Tim, was announced in mid-April and is being phased in accordance with their contracts with customers as directly charge due to significant increase in costs we have seen in energy and distribution. These costs were up as indicated in our press release in the quarter of about $1.1 million over the last year or about $0.02 per pound. The price increase, we expect, will have a normal impact on the second quarter and we should start seeing the full benefits of it though in the second half of the year.

Thank you.

Welcome.

Thank you. We do have a follow-up question from Rob Longnecker of Barrington.

Yes, Rob.

It was actually answered. Thank you.

You are welcome.

Thank you. 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 July.

Ladies and gentleman, thank you for your participation in today's conference.

[Operator Information]

This concludes the program. You may now disconnect.