Tredegar Corp (TG) 2005 Q3 法說會逐字稿

Good morning and welcome to Tredegar Corporation’s Third Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS]. I would now like to introduce Drew Edwards, Tredegar’s CFO and Treasurer who is your host for today’s conference. Mr. Edwards you may begin your conference.

Good morning and welcome to our conference call. I’m joined today by Norm Scher President and CEO, Nancy Taylor Senior Vice President and President of Film Products and Duncan Crowdis President of our Bonnell Aluminum Extrusion Subsidiary who is joining us from Newnan, Georgia.

Here’s the agenda for today’s call. I’ll give you a very 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 statement.

The comments we make today and the 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, 2004 which is on file with the SEC and in our earnings release and the Form 8-K 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 these measures, including why we employ them and a reconciliation to comparable GAAP measures, please refer to our earnings release and our Form 8-K both of which are available on our website at Tredegar.com.

I’ll begin with a brief summary of quarterly earnings. 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 7.6 million or $0.20 per share versus $15.3 million or $0.40 per share in 2004. Results reported under GAAP include a variety of special items that are explained in the press release. The GAAP figures also include results from our substantially divested Therics subsidiary which is now known as AFBS.

From this point on, unless otherwise noted, the comments we’re making in today’s call refer to third quarter results from continuing manufacturing and operations excluding special items. Third quarter income from manufacturing operations was $8.8 million or $0.23 per share, down from $9.9 million or $0.26 per share in 2004.

Operating profit in film products was up 25% to $13.8 million but was offset by a 41% decline in aluminum extrusions operating profit to $4.4 million. Sales from manufacturing operations rose 8% to $241 million; sales in both film products and aluminum extrusions were up over last year due primarily to raw material driven higher selling prices. Sales in films were also up as a result of growth in the sales of our higher value added products.

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

Those of you who are used to talking to Mitzi Reynolds and maybe following up after this call, I can assure you Mitzi is here. She has a case of laryngitis but she assures me she will be able to handle follow-up phone calls today. So Mitzi we’re glad you’re with us and we hope you recover rapidly.

As Drew pointed out, third quarter results from manufacturing operations were down versus last year despite strong profit growth in films. The improvement in films was driven primarily by growth in high-value added products. For example, our new surface protection films are showing great promise in flat panel display applications for products like laptops, televisions and cell phones. This is a fast growing market with stringent quality requirements and we’re investing in new capacity to serve customers in Japan, Korea and Taiwan. We are also experiencing continued growth in new top sheets for feminine hygiene products. Finally our elastics business picked up during the quarter and we’re hopeful that demand for elastics will continue to grow as customers use more of these products to enhance comfort and fit in diapers and adult incontinent problems.

Unfortunately, this recent strength in films is being overshadowed by the resin price issue. As most of you know, we’ve been dealing with rising resin prices since 2002. This long-term upward trend has accelerated in recent months with hurricane related supply shortages, driving prices to record levels. While supply tightness is expected to continue into the first quarter of 2006, we believe the customer demand will be met in the fourth quarter with a combination of existing inventories and purchases including resin purchase from sources located outside of hurricane damaged areas.

During the third quarter, [inaudible] resin prices jumped from $0.59 to $0.78 per pound. That’s a 32% increase. Since the bulk of this cost increase during the third quarter occurred late in the quarter, the impact on profits was relatively minor. The major portion of the cost impact will be absorbed in the fourth quarter and the impact is expected to be substantial.

As we previously reported, the majority of business is covered by index-based pass-through arrangements; but there is a time lag associated with price changes. We’ve also announced price increases for our non-indexed customers.

It’s extremely difficult to predict the degree of which profits will be hurt but our expectation at this point is that fourth quarter profits in films will decline significantly from last year’s level of $11.4 million.

I’m now going to comment briefly on aluminum and then we’ll take your questions.

The unfavorable third quarter results in aluminum more than offset the improvements in films. Profits declined about 40% on flat bottom. Just as films cannot escape the impact of soaring resin prices, aluminum is another victim of the broad and sharp rise in energy costs.

Natural gas prices have risen more than 75% since the second quarter and big increases in electricity and diesel fuel costs are having a major impact as well. In fact, of the $3 million profit decline from last year’s third quarter, $2.3 million is directly attributable to higher energy costs. Appreciation of the Canadian Dollar accounted for the balance of the decline.

We estimate that every $1 mmBtu change in the monthly price of natural gas has a profit impact of about $150,000 per month. To buffer the impact of energy costs, we’re continuing to raise prices but it is very difficult to keep pace with such a rapid rise in costs. The energy cost squeeze is being exacerbated by relatively flat volume overall with continued weakness in Canada.

On a more positive note, we are seeing some growth in certain segments within commercial construction including non-residential windows and doors, walkway covers, louvers and vents. Shipments of hurricane shutter components also remain strong.

In summary, the current environment of rising energy and resin costs has added significant volatility to our earnings picture making it extremely difficult to forecast near term results. We believe that films is facing potentially substantial declines in fourth quarter profits and that aluminum’s profits will continue to be hurt by high energy costs.

That covers the presentation portion of today’s call. We’ll now open it up for questions. Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from Rob [Longnecker]. Please go ahead.

Sorry if I’m repeating anything. I joined a minute or two late. Two questions-- The first is on the film side. Putting aside the cost side of the business, how do things look on the revenue side? Have you guys had any major contract wins or losses in the last quarter or so?

We continue to make progress with our new products and we’ve seen, as Norm mentioned, a pick-up in our elastics and that does reflect some new customers incorporating our products into their products. We do continue to make progress and are seeing opportunity for new business of customers.

And what about in the next three to six months or even going out a year, do you guys have any major pieces of major contracts that are up for renewal or up for review by your customers?

We can’t really specifically talk about potential business opportunities at this point. Typically, those are covered by confidentiality with our customers or potential customers and we would, obviously, make an announce-- If there was something significant, we would make an announcement at an appropriate time; again, after getting released or permission from our customer.

And just jumping over to extrusion a second, I think I heard you say that there was strength in non-residential construction. What about residential construction putting aside hurricane shutters; just kind of the core business?

The residential construction business is relatively strong in the marketplace. Our business is down a little bit largely because we have been focusing on ensuring that our customer base is one that we can be profitable with and we have done some culling out; in general though, the residential business is relatively strong. We slipped a little bit from the second quarter because of that.

And then something that’s kind of popped up, I think, in past calls – competition from China. Is that about the same as it’s been? Is it better? Is it worse?

The competition with China continues to be there and it will continue to be there in areas where it makes sense for the supply from off-shore to penetrate and other areas it will continue to be very strong in the domestic side; so about the same. It continues to make some inroads where it makes sense.

Your next question is from Ed Brea with Sterling Capital. Please proceed with your question.

Can you talk about capital spending lines directionally for 2006 in both divisions?

Let me ask the two general managers-- And they are going to have to make pretty general responses to your questions because we’re in the middle of the planning process right now; but, Nancy do you have a general answer to what Ed’s asking?

I think we’re not in a position to comment on that at this point.

Okay. How about you Duncan?

We don’t have anything major but our capital spending in 2006 we anticipate will be in the same range as 2005.

Asking Nancy the question, there’s been enormous amounts of capital put into film. I’m asking the question again, directionally, is the expectation it should be lower or are there other projects on the horizon that are going to sink capital into that division?

Ed, we’re in the process of our planning process for next year. I can tell you that we’re looking at capital requests that have come in very closely. But at this point, I’m not in a position to comment one way or the other because we’re really not through that process yet.

I’d ask on the December call to have a pretty explicit communication with shareholders on that spending which has been enormous.

Going to aluminum, can you just break down for me the end markets between non-residential and residential and within residential what’s considered remodel versus new construction?

Ed, if you could explain what you mean by remodel--? I’m not sure the question you are asking.

Specifically with residential construction with people that supply that product, some companies are able to break down what’s considered new construction so people can, again, look at new construction trends and decide what’s normal and then what goes into the repair and remodel or the renovation side of the business.

I guess I don’t--

Is that considered less cyclical than the new construction side? Does Tredegar have any kind of delineation?

No. We don’t look at it that way. Most of our customers on the residential side participate in both the renovation as well as new construction side of the business and I think you’ll find them both cyclical.

How about non-res versus res?

In non-residential, we see the non-residential market strengthening as we speak as well as, as we look forward.

I guess I’m asking, what’s the break-down in your aluminum business between non-residential and residential?

The non-residential--

Non-residential is about 40% of overall volume – let me help you out there a little bit, Duncan – and residential is about roughly 20% of overall volume.

And then the remainder would be what?

Collection of transportation, electrical, consumable/durables, machinery equipment in large chunks. Distribution is a big part.

[OPERATOR INSTRUCTIONS] Your next question is coming from Timothy Hayes with BB&T Capital Management. Please go ahead.

Question for Duncan. Would the recent acquisition by [Indolex] by Sun Capital, the private equity firm - what kind of change in competitiveness do you think that new management may have for you and the second question is the MA activity increasing in the soft alloy extrusions and how much you’ll be a part of that.

Before Duncan answers, it’s my understanding that although that acquisition has been announced, it has not yet been closed so I don’t think it’s a completed deal right now. That said, Duncan, on speculation about whether or not anything will change with Sun as the new owner of Indolex, I think we need to be very careful there. I think it’s very hard for us to answer a question like that. Have you got any general reaction to that question?

I think you’re right, Norm. We don’t have the answer to that question nor would I even want to pretend to know what the answer to that question was. Indolex is a very good competitor and will continue to be and that’s the way we would see it.

How about the next question? Tim, you asked that and then you asked a follow-up, I think.

In terms of mergers and acquisitions, Tim?

Yes. That’s what he asked.

We don’t see a lot of activity; certainly, I’m sure, everyone is keeping their eyes open but there’s not a lot of activity that we see right now, Tim, on the soft alloy side.

Your next question is coming from Hardin Bethea with Deprince, Race and Zollo. Please go ahead.

I guess I have a bigger picture question related to another caller’s capital expenditure question. When you look at allocating capital going forward, how is it that you’re determining where the best use of that capital is? And I guess I’d preface the question with - at least from a shareholder perspective - what the return on capital spent in the films business has been to date at less than satisfactory. Now obviously some of that comes from resin pressure; but how do you look at spending capital going forward and what are kind of the return on capital metrics used to make those decisions.

Well, I think we’ve attempted to answer that question several times and I think we continue to get that question which indicates a degree of maybe dissatisfaction out there in terms of our decision-making process. But I think in terms of allocating capital, we’ve got a disciplined process and it’s one that requires the general manager to make the points necessary to capital and make them very specifically. Nancy, I’ll ask you and then I’m going to come to you, Duncan. You’ve been a general manager now for only about six months and you’ve been in the middle of the capital request process now on several occasions; so how would you characterize your own decision to promote or request for capital and, if you choose to comment on this, the process we use to assess your request?

Well, we’re as painfully aware as our shareholders are of the amount of capital that’s gone into films over the last couple of years; and so I can assure you that we’re not cavalier in any way in terms of making a decision to actually put additional capital into this business. I think the decisions really are around what we view as being strategic importance of the business overall. Generally, a vast majority of the capital that’s going in is going in to support specific customers or specific revenue opportunities. Beyond that, there is-- We do prepare full economics to support the capital requests and depending on the level of the request, we could either need the approval of the executive committee or of the board of directors; so there is a very disciplined process that we’re going through in terms of actually wandering forward a capital request and then also for that capital to be approved.

Can you give me a sense for what maintenance level the CapEx is for each business or for Tredegar as a whole?

Yes. What’s maintenance capital generally at aluminum? Is it about 10? Is that about right?

We’re running in that range; probably about half of that would be just continuity kinds of projects, Norm.

Okay. How about in films? Do you have that number? Is there a number?

Yes. I would say that without special projects, large customer specific opportunities that maintenance capital which includes some ongoing strategic capital would be in the $35 million range. The amounts that we’ve spent historically above that have been tied, again, to customer specific large projects as well as the growth that we’re seeing in our surface protection films.

I guess then-- I totaled up over the last 11 quarters CapEx has been $170 some million through the third quarter; obviously, some of that is maintenance but a relatively significant part of it is design for growth opportunities and both have not done that. I guess when you look back, do you have any post-mortem analysis on your CapEx spending that in hindsight would have called you to make different decisions as you move forward and perhaps find a better use of that capital for the shareholder?

Well, post-mortem means that we’ve buried something and I start out by saying that I think our decisions to spend capital within films over a period of time-- as you correctly point out lessons have been learned. And one of the biggest lessons that has been learned that is not being repeated as we go forward is that we need to be much more careful about CapEx and the magnitude of CapEx. I think we may have built some lines in the past that if we had it to do all over again, we would not have spent the type of capital on those lines that we’ve spent. And we may have also decided that the nature of the markets would give us more opportunity for revenue on particular products than they have really given us.

So I think we’ve sharpened our wit insofar as our ability to attempt to assess this rapidly changing market and I think we’re using that on an ongoing basis. Nancy, in particular, at films with what she’s doing; and I think we’re also discovering some opportunities that we’ve got to spend capital on more exciting and perhaps more rapid returns than we were able to enjoy in the past. So I really can’t elaborate beyond what I’ve said. Nancy may want to add something; but I think we are a better steward of the capital of this Company today then we were several years ago. Lessons have been learned and those lessons are being employed as we speak. Nancy would you like to add anything to that?

I think the only thing that I would add is, again, this capital is going in for generally pretty specific business opportunities and I will repeat, again, that we obviously understand that the pattern here is one that we have to figure out how we break to some extent. I’ll mention again, I’ve mentioned before, that we’re very focused on developing low cost strategies for future investments. We have a team of folks working on that. We’re optimistic but that is not something that happens overnight. I think that will be an important element to getting to a point where some of these trends that you’re seeing may actually finally turn in a better direction.

Your next question is a follow-up from Ed Brea. Please go ahead.

This, Norm, is maybe for your and Nancy’s benefit but we have, obviously, we have written the Board regarding capital spending and just to put it in context because I don’t know if Nancy you can appreciate the magnitude of the context here.

This Company since 1999 has spent $771 million on capital and investments. Investments that fall into aluminum, they fall into film and they fall into venture capital investments. In 1999, this Company’s enterprise value was $1 billion. Today the Company’s enterprise value is $500 million and we’ve only received $30 million in dividend payments. This is an exceptionally poor record and Norm, I appreciate the comments. I think you all need to fundamentally look at whether aluminum or film are good enough businesses for shareholders to keep spending capital in. That’s just a statement. Thank you.

Thank you.

Mr. Edwards, there are no further questions.

I want to thank everyone for participating on our call today. We look forward to updating you after the first of the year.

Ladies and gentlemen, thank you for your participation in today’s conference. [OPERATOR INSTRUCTIONS]