Tredegar Corp (TG) 2005 Q2 法說會逐字稿

Welcome to the Tredegar Corporation Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to introduce Mitzi Reynolds, Tredegar's Director of IR, who is your host for today's conference. Ms. Reynolds, you may begin your conference.

Thank you, and good morning. And welcome to our conference call. I'm joined today by Norm Scher, President and CEO, Drew Edwards, our CFO and Treasurer, Nancy Taylor, SVP and President of Tredegar Film Products, and Duncan Crowdis, President of our Aluminum Extrusions subsidiary, the William L. Bonnell Company.

Here's the agenda for today's call. I'll give a brief review of yesterday's earnings release, Norm and Duncan will follow with some general comments, and then we'll 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 10K for the year ended December 31st, 2004, which is on file with the SEC, and in our earnings release in the form 8K, that has been furnished to the SEC.

In an effort to provide useful information to investors, our comments today also include non-GAAP financial measures. For details on those measures, including why we employ them and a reconciliation to comparable GAAP measures, please refer to our earnings release and the form 8K, that's been furnished to the SEC, those of which are also on our website at Tredegar.com.

I'll 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 one.

Second quarter income from continuing operations under GAAP was $2.1 million, or $0.05 per share versus $5.2 million or $0.14 in 2004. 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 second quarter results from continuing operations, excluding special items.

Second quarter income from manufacturing operations $9.8 million, or $0.25 per share, down slightly from $10.6 million or $0.27 in 2004. Sales in both film products and Aluminum Extrusions were up over last year. In film, sales rose 10%, to $111.2 million, operating profit from ongoing operations was up about 5%, to $11.4 million. Volume was down 10%. On a sequential basis, since the end of the first quarter, net sales and operating profit in film declined 5% and 2%, respectively. Volume was down 5%.

In aluminum, sales rose 16% versus the year-ago quarter, to $126 million. Operating profit from ongoing operations declined 13%, to $7.2 million. Volume was up slightly.

On July 1st, we announced the divestiture of substantially all the assts of our Theric subsidiary. The second quarter operating loss from ongoing operations at Therics was $1.6 million compared to a loss of $2.5 million last year. This translates to an after-tax loss of $1.1 million or $0.03 per share versus a loss of $1.7 million or $0.04 last year.

I'll now turn it over to our CEO, Norm Scher. Norm?

Good morning and thanks to everyone for taking the time to listen in to today's call. Before I get started, I want to welcome and introduce Duncan Crowdis, our new president of Bonnell, who's joining us today on the call from Newnan, Georgia. Duncan has been in the aluminum extrusion business for about 30 years, and has been with Tredegar since 1998, most recently as manager of our plant in Newnan. We look forward to seeing the results of his experience and efforts. You'll hear more from Duncan in a few minutes, when he discusses aluminum's results.

As Mitzi pointed, second quarter results from manufacturing operations were down versus last year, with a slight profit growth in films offset by a profit decline in aluminum. As we began the second half of the year, both businesses are facing some challenges that we hope are temporary in nature. Nonetheless, it appears that it will be difficult for either business to match the full-year profit levels achieved in 2004. In films, the improvement in profits over last year was achieved due to growth in new apertured elastic and surface protection materials. However, looking at sequential results, profits were down slightly from the first to the second quarters, a decline which occurred despite a $1.5 million benefit from lower resin costs.

Unfortunately, there's been a slowdown in the growth of our elastics business in recent months. Profits have also been affected by lower volume in certain non-elastic, diaper-related components and packaging films. Given these trends, combined with our expectation of higher resin costs, 2005 profit in films may not exceed last year's level.

Looking ahead to next year, growth in new aperture top sheets and surface protection film is expected to continue into 2006, and we also expect our elastics business to regain momentum as our customers use more of these materials to improve comfort and fit in a variety of personal care products. Most importantly, we must continue to focus on developing innovative materials at or below current material costs, including lowering of equipment and other capital costs, and indeed, our overall cost structure, in order to grow our films business.

That's it on films. Nancy is here to help with any questions you may have. Now, Duncan, I'm going to turn it over to you and ask you to make a few remarks.

Thanks, Norm, and good morning, everyone. Second quarter profits in aluminum were down, due primarily to two factors - the continuing appreciation of the Canadian dollar as well as higher energy costs. Together these factors have had a negative impact of about $2.1 million. While weakness throughout our Canadian market is continuing to hurt profits, our U.S. operations are performing relatively well, thanks to the strength in commercial construction markets and higher sales of hurricane shutter component products.

We've also made good progress in attracting what we consider to be preferred business. This is business that fits well within our capabilities, is profitable, and serves the markets that are growing faster than other markets in our industry, markets such as the non-residential window business. So far in 2005, orders are up about 4%, which is in line with our expectations.

As we look to the balance of the year, we expect our U.S. business to continue to perform well. The only sign of weakness, again, is in our Canadian markets, where we are aggressively applying resources to identify and pursue new business opportunities. While I'm confident that we will be successful in this endeavor, it's not enough. For meaningful profit growth to occur here, we must also look inward and capture quickly cost reduction opportunities while improving other performance measures, such as quality and service.

Despite our near-term challenges, I believe we have a strong company. We have an excellent reputation and a very experienced and dedicated management team. My goal is to leverage these strengths to achieve meaningful profit growth and I certainly look forward to updating you on our progress next quarter. Thank you. Norm?

Thanks, Duncan, and now let's open it up for questions, operator.

[Operator Instructions] Timothy Hayes.

I had a couple of numbers questions. On the plastic films, how much volume was there from the Argentine plant in Q2 of '04?

[Rudy] do you want to answer that one?

Q2 '04 had volume of about 3.3 million pounds.

OK, and then the decline in polyethylene prices in Q2 of '05 from Q1 of '05, can you give us a cents per pound, how much that went down?

Yeah, on an average quarterly basis, using [CDI] U.S. large buyer index for polyethylene, the first quarter '05 price, excluding the non-market related adjustment, was $0.73 per pound. In the second quarter of '05, it was $0.67.

Where does that stand today?

We expect that in August, we'll see a $0.06 per pound increase.

And is that straight-- just driven from oil prices bouncing back up, or are there more factors going on there?

There are a lot of factors going on there.

OK. And then the final question, for your second half guidance in film, can you give us a little bit more detail on expectations for volume and margins?

[Nancy], do you want to talk to that?

Well, you know, it's hard to tell right now, Tim. Film deposits last year were $43.3 million, profits in films for the first six months were $23 million, so at this point, you know, we expect second half profits may be at or below $20 million.

Yeah, I was able to infer that. I was just curious if that was more a function of margin or more a function of volume, just to get a better handle on the components.

It's really a combination of both, a combination of both.

[Ed Bray], Sterling Capital.

First thing, with respect to Therics, I'm assuming now there's going to be no more operating losses or impact from Therics, post second quarter?

That's right, Ed. There's a very modest additional amount that could affect the P&L in the rest of the year. How much is that, Drew?

That's roughly $200,000, and what we're carrying, Ed, on our balance sheet is about $170,000 value for our remaining interest in Therics and about $800,000 for our interest in Theken Spine. And the amount that we've got in Therics, we have to apply the equity method. We expect that will be written off in the third quarter and then the $800,000 for Theken Spine will be subject to lower cost, or fair value accounting.

OK. So a little bit less than $1 million in total as far as a remaining asset?

In terms of exposure, yes.

Exposure, OK. Comment on the film business, why- what I tend to think as more of a stable consumer product business, whether the volume we'd miss in the second half is a function of either a product discontinuance or a function of inventory destocking at your customers, or what's the nature of it?

Let me turn that one over to Nancy, Ed.

There are a couple of dynamics that are going on there. We-- we mentioned, we have seen a slowdown in our elastics growth. While we do expect to still see some growth, it's not at the same pace that we were seeing at the end of last year. We also- our existing top sheets in the personal care business are under a lot of pricing pressure and as you know, there's been a new top sheet that's been introduced by Procter & Gamble in the marketplace and that's created a lot of disruption in the marketplace, and so a lot of customers are looking for new top sheets to compete with that. For us, we're expecting to see continued growth in our aperture top sheets, as customers are responding to the success that Procter & Gamble has had, with the introduction of this new top sheet.

On the packaging side of things, we actually have seen that customers have been redesigning their packaging, which has had a negative impact on our volumes there. We do at least think in terms of some of our products, we have a competitive advantage, so we're actually looking to expand our customer base there as we try to fill the excess capacity that we have right now.

We- I think the take away, which Norm addressed in his initial comments, is that our long-term growth really is dependent on our ability to continue to provide innovative materials but at a cost that's either level or below our current material costs, and there are ways that we're going to be looking to do that, which include lowering our equipment and our other capital costs, as well as continuing to focus on reductions in our overall [inaudible] cost structure.

And I guess I would add to that, your opening premise about us being in a relatively stable business, is really not the case, and I think what Nancy has illustrated and what we're trying to make clear to you and the others is that the challenges here are to stay ahead of the curve and to anticipate very frequent changes that come from our customers and our competition, so there isn't an element of stability about the films business at all.

OK, because I guess in past conversations, you talked about the heavy spending in film to have a lot of contractual protective measures -- in other words, you'd be able to earn back the investment you're making, based on, I guess, the agreements with the customers, and I think what I'm hearing is something different, which is you've made the investment and now the-- between package redesigns and top sheet changes- changes in top sheet, that you're having once again to compete with new competitors on new products, so maybe you know, clarify that in my mind, please?

Well, let me-- because I've had those conversations with you. Let me explain that on the element of our business that we've discussed, where we have had capital guarantees, those business items continue on. What we're referring to now is the additional growth opportunities that we've got, where you don't get capital guarantees from customers- from customers, and you have to be out there, competing, anticipating, and trying to make a buck. That's the area that Nancy is referring to, primarily. We continue to be very comfortable with the capital guarantee part of our business. It's going as we expected. It's unfortunately not anywhere close to 100% of our business.

Yeah, I just-- to augment that a bit, you know, we have, as you would imagine, products that are, you know, at various stages of maturity, and it's- where we're really under a lot of competitive pressure and a lot of pricing pressure is under those more mature products.

Yeah, just to go a little further, the-- I understood a year or two ago, the back sheet business, that there was, you know, pretty significant market share loss and the business was virtually going away, and I think it has. It's running at very low levels. Is the top sheet business another-- what percentage of revenues does top sheet represent, because now I guess we're moving into top sheet as having competitive inroads?

Well let me say, A, I don't think we disclosed that, but B, that's a very good example of what Nancy and I are trying to tell you. There's a part of the top sheet business where we do have customer guarantees. There's another part of the top sheet business where we sell top sheet to many customers, and we don't have customer guarantees and the more business we do in that area, with customers that are interested in our top sheet, the better our opportunities would be to improve our margins. But it's-- it's a mix of business that you simply have to understand, and top sheet itself is a great example of that, because a significant part of our top sheet business is under guarantee, and that's going quite well.

Yeah, overall, aperture top sheet probably represents about 1/3 of our business, Ed, and some of our older top sheets are under pricing pressure and this has been exacerbated by the significant increase in resin costs that we've seen over the last couple of years.

Just a couple of more questions. Capital spending, as you're looking out into '06, obviously you know, looking backward, we've spent an awful lot of money here. With the new change in leadership, is the expectation now that we'll see pretty significant declines in capital spending or more of a leveling out?

I've got the new leader and that's a question I'd like for her to answer.

Yeah, I mean, I can't tell you today what our expectation is going to be for 2006, other than to tell you that we are extremely focused on getting that number down from where- the level we've been over the last two years, you know, and we're going to be doing that in two ways. One is, as I think we've alluded to, we are really focused on just looking at ways to lower overall equipment costs and you know, one significant way of doing that is to leverage our position in China and we're looking, you know, we're actually already doing some equipment sourcing from China, we're evaluating that, so that is, for us, a very attractive option in terms of lowering overall capital cost.

But the other thing that I'll tell you is that there is, I think, a higher degree of scrutiny that will be applied on capital requests going forward in this business. There's absolutely no question that we've got to get these levels down from what we've seen over the last couple of years.

And my last question is just a balance sheet question, which is if we're looking at a horizon of declining capital spending and both businesses are obviously cash-generative businesses, is there anything either the board or senior management is thinking with respect to the current balance sheet?

Well, let me answer that. Clearly today we are concentrating on what you just said, and that is getting these businesses into much better profit levels, and that's where our efforts are going. We don't have any present plans at all for any significant expansions outside of where we are, so growth in Tredegar will be coming from aluminum and films. The board constantly reviews our dividend policy, the board constantly thinks about the possibility of buying in shares and reviews the other corporate opportunities that Tredegar may have. It's just premature for me to say much more than that right now, except to make the point that for the foreseeable future, we're going to be concentrating on fixing these businesses and getting them more profitable.

Ms. Reynolds, there are no further questions.

OK, thank you. I want to thank everyone for participating in our call today. We look forward to updating you in October.

This call will be available for replay beginning at 2 p.m. Eastern Daylight Time to 11:59 p.m. Eastern Daylight Time, August 11th. The number to dial for the replay is 888-509-0082 for domestic callers, or 416-695-5275 for International callers. An archived copy of the Web cast will be available for replay on the Company’s Web site, at www.Tredegar.com, beginning at 2 p.m. Eastern Daylight Time today. To listen to the call, select the Web cast of 2nd Quarter Results link on the home page.

This concludes the program; you may now disconnect.