Tredegar Corp (TG) 2013 Q4 法說會逐字稿

Good day and welcome to the Tredegar Corporation 2013 annual financial results webcast. My name is Ryan, and I will be your web event specialist today.

(Operator Instructions)

It is now my pleasure to turn the conference over to the Neill Bellamy with the Tredegar Corporation.

Thank you, Ryan, and welcome to the Tredegar 2013 annual financial results review. Our earnings for the fourth quarter and full year 2013 were released after the close of the market today. And you will find our press release as well as supplemental materials including non-GAAP reconciliations on our website under the investor section at www.tredegar.com. As a reminder, some of the statements made here about the future performance of the Company constitute forward-looking statements within the meaning of federal securities laws.

Please note the cautionary language about our forward-looking statements that is contained in our press release. That same language applies to this call. Please note that our comments today regarding financial results exclude all non-operating or special items. And reconciliations related to any non-GAAP financial measures discussed today may be found in the slides accompanying this presentation and our supplemental materials on our website.

With that, I'll turn it over to Nancy Taylor.

Good afternoon. I'm Nancy Taylor, Tredegar's Chief Executive Officer. With me today is Kevin O'Leary, Tredegar's Chief Financial Officer.

Thank you for joining us today for our first annual financial results review. As part of our efforts to expand our shareholders communications we are establishing an annual conference call to discuss our year-end performance and update you on our strategic initiatives.

On our call today I will review Tredegar's strategy, our progress against our strategy, and our 2013 financial highlights. Kevin will provide a more in-depth look at our fourth quarter and full year financial performance. Then I'll share our view of market dynamics for the coming year and comment on our outlook for 2014.

With this being our inaugural annual financial review, I thought it would be helpful to provide some background on our strategy and recap the progress that we've made. I know we have some folks listening in today that have been long-term shareholders, and I appreciate you indulging me as I provide some important context on our current strategy.

In early 2010 we took stock of Tredegar's strengths and vulnerabilities. On the vulnerabilities side we were struggling to realize sustained top-line growth, and our businesses had heavy customer and market dependence. We also recognized our many strengths which include a strong track record of manufacturing excellence, leadership positions in attractive markets with good growth trends, global capabilities, product innovation, a strong balance sheet, and businesses with strong cash generation. With that assessment the strategy was very clear to us, focus intensely on manufacturing as we pursued organic and inorganic growth to reduce our customer and market concentration.

We were fortunate that we participate in market with favorable trends and that we have deep knowledge about those markets. Our knowledge of our markets also allowed us to identify nearer term challenges which in turn underscored the need to pursue additional markets with attractive growth trends where our strengths would be an asset. An example, we know there is high penetration and low growth rates for certain personal care products such as feminine hygiene pads in the developed regions like North America and western Europe.

In response, we have strategically invested in less developed countries where the growth rates for those product are higher. We made those investment decisions understanding the short-term challenges in the emerging markets, knowing that by the very nature of a developing economy, there would be ups and downs. We take a longer term strategic perspective that we have to be in the emerging markets to remain a leader in personal care and to participate in that growth opportunity.

Our knowledge of our markets shaped our strategy in Bonnell, our aluminum extrusions business. We saw that a meaningful recovery in the North American non-residential building and construction market was going to take longer than in past cycles. So we did our homework to identify new markets to pursue that fit our strengths.

The acquisitions that we have made fit well within our strategy. Each one has served to reduce our customer and market concentration, and each one has broadened our capabilities and product offerings. I hope this context around our strategy has been helpful. We are committed to our strategy, and as the next two slides illustrate, we have taken action and are making significant progress.

As I have already mentioned we see growth opportunities in the emerging markets. And we are going after those opportunities with our plant in Pune, India which we are now expanding along with capacity and capability expansions in China and Brazil. The continued demand for and increasing quality requirements in smartphones, tablets, and other displays create exciting opportunities for our surface protection films. And we are investing in capacity to capture growth in that market.

And new technologies and products allow us to play in new markets, also with attractive growth trends, such as lighting, automotive, and value-added fabricated aluminum products. We have taken action through our investments in emerging markets, capacity expansion to meet growing demand, acquisitions, new capability and new products, and we have done so while returning capital to our shareholders.

From 2010 to 2013, we have returned $85 million to shareholders through share repurchases, a special dividend, and quarterly dividends, which we have increased three times in the last three years. Our strategy has had positive financial results. Our earnings per share from ongoing operations are up 30% since 2010. We've reduced our customer and market concentration, and our return on invested capital is 9.4%.

Now moving to our performance in 2013, I'm going to hit the highlights, and then Kevin will walk you through the numbers. 2013 year-over-year net sales and operating profit improved for both film products and Bon L despite challenges in flexible packaging and little to no growth in the non-residential building and construction market. Film products benefited from volume rebounds for our personal care and surface protection films with record net sales for our surface protection films which was supported by several successful new product introductions.

Profitability as measured by segment operating profit was $10 million higher in 2013 than in 2012 thanks to a strong performance in Bonnell which benefited from the full year impact of the AACOA acquisition and an effective program of cost containment. Film product results were impacted by market and operational challenges in flexible packaging. As we discussed when we acquired this business, there is a global cycle for PET packaging films.

The severity of the down part of the cycle has been worsened by the economic slowdown in markets such as China, India, and of particular importance to our business, Brazil. So to be clear, while we expected a down cycle, it has been deeper and earlier than we anticipated.

During the year we also experienced some operational inefficiencies in producing our flexible packaging films. We have dedicated resources in place to address those productivity issues. As I mentioned, non-residential building and construction was flat in 2013 from 2012 so Bonnell didn't see any volume growth from this important market.

Additionally in 2013, we experienced an unfavorable product mix towards no finish products. To combat this we have taken appropriate cost actions at Bonnell to the change in product mix.

The AACOA acquisition has strengthened our aluminum extrusion business, and in 2013 we began to capitalize on AACOA's value added fabrication capabilities and market diversity. The acquisition integration process has gone well, and we are implementing the best of both companies across the entirety of the Bonnell organization.

For film products, I want to emphasize the positive customer response to our new products introductions which contributed to the strong demand for our surface protection and personal care materials in 2013. We are also excited about the market pull Bonnell has experienced following the announcement of our investment in a new press to serve the automotive market.

I will now hand it over to Kevin who will cover our 2013 results in more detail.

Thank you, Nancy. I will start off with an overview of reported net income for the fourth quarter and full year for Tredegar Corporation.

For the fourth quarter, diluted earnings per share from continuing operations were $0.29 per share. Excluding special items, earnings per share from ongoing operations were $0.27 per share. For the full year, diluted earnings per share from continuing operations were $1.10. Excluding special items, earnings per share from ongoing operations were $1.15 per share.

In 2013 we had an after-tax charge to discontinued operations of $14 million, or $0.43 per share for spending related to an environmental claim at a facility that was part of our February 2008 sale of Bonnell Canada. We believe we've recognized all expenses relating to this matter. Details of special items which include the impact of non-operating investments, asset impairments and restructuring charges are available on our website along with additional information on discontinued operations.

Now let's focus on earnings per share from ongoing operations. For the full year, earnings per share from ongoing operations was $1.15 per share. The combined operating profit from ongoing operations of our business segments, film products and Bonnell, was essentially flat for the fourth quarter and up 13% for the full year.

Full-year results include a 9% increase in net sales driven primarily by the addition of AACOA acquired in the fourth quarter of 2012. I'll get into the details of results for film products and Bonnell in a moment.

Non-cash pension expense was up for the fourth quarter and full year compared to 2012. Pension expense for 2013 was $13.7 million, an increase of $5.6 million, or $0.11 per share compared to 2012. Looking into 2014, we expect pension expense to be quite a bit lower at roughly $7.5 million due to a 78-basis-point increase in our discount rate and our initiative to fully freeze our defined benefit plan.

In the second half of 2013, we incurred $1.4 million or approximately $0.03 per share in spending related to our response to the schedule 13-D filed with the SEC in September of 2013. In the first quarter of 2014 we expect additional charges of approximately $1 million to $2 million related to this matter. The full year 2013 effective tax rate on income from ongoing operations was 31% compared to 26% in 2012.

The increase, which was driven by a geographical income mix, had an earnings per share impact of approximately $0.08 per share. In 2014, we expect the effective tax rate in the range of 32% to 33% with a year-over-year increase also driven by geographical income mix. Overall in 2013 non-cash pension expense, 13-D related spending, and the change in effective tax rate for income from ongoing operations had a $0.22 impact on earnings per share from on going operations.

In looking at our segments, let's begin with film products. For the fourth quarter net sales were essentially flat and operating profit from ongoing operations of $16 million, was down $4 million compared to prior year.

Lower operating profit from ongoing operations in the quarter was primarily driven by flexible packaging, and there were a couple of drivers here. Production volume was down compared to the fourth quarter of 2012 which was the highest of any quarter since the acquisition of Terphane in October of 2011. While pricing is down year-over-year, driven by slow growth in Brazil and global supply demand dynamics for polyester films, we believe that we are at or near a bottom here.

We've added local resources at our facility in Brazil to accelerate productivity initiatives. As Nancy mentioned we know how to operate plants, and we have a very strong reputation for operations' efficiency and effectiveness. Translating Tredegar's core competency for this work into this facility in Brazil has been a bigger challenge than anticipated. We've put a lot of attention on Brazil, and in the last few months we've competed for talent effectively with a number of other growing companies in northern Brazil.

Also, planned hiring and training of staff for the new production line in Brazil is ramping up. Facility expansion is complete, and equipment installation is well under way. We look forward to the start up of the line during the second quarter of 2014.

For the full year in film products net sales of $621 million and operating profit from ongoing operations of $71 million were both up 1.5%. Surface protection posted record sales in 2013 with year-over-year growth of 30% driven by the success of new product offerings and strong demand for tablets and smartphones. Our quality and reliability support our customers as they address increasing demands in this industry.

Personal care sales increased 4% as new products gained traction in 2013. Overall film product delivered an increase in operating profit from ongoing operations compared to 2012 as strength in surface protection and personal care covered some challenges in flexible packaging.

Let's take a look at Bonnell. Simply put, we had a strong year -- quarter and year at Bonnell. For the fourth quarter compared to prior year, net sales were flat and operating profit from ongoing operations was up $4 million. Net sales were unchanged as higher volumes were offset by a pass-through of lower average aluminum prices.

The impact on operating profit from ongoing operations for the quarter was driven by a number of factors. Overall volume was up despite lower volume in non-residential building and construction. We achieved some savings following integration of the AACOA acquisition as we anticipated. Pricing on value added services, spending for supplies and maintenance and SG&A were also favorable in the quarter.

Results for the full year at Bonnell include the addition of AACOA acquired in October of 2012. Net sales increased $64 million to $309 million for the year due to the addition of AACOA. And with the addition of AACOA we reduced our concentration in non-residential building and construction in 2013 to 60% compared to 70% in 2012. While the growth in the non-residential building and construction industry was essentially flat, we successfully held our market share in this important market.

Operating profit from ongoing operations improved $9 million to $18 million for the full year. The impact of the AACOA acquisition including synergies was approximately $4.8 million. Results for the full year also include cost savings from the 2012 shutdown of our manufacturing facility in Kentland, Indiana and the benefit of lower spending for supplies and maintenance.

A Couple of other highlights to -- financial highlights for 2013. As you look at some of these numbers, I want to remind you that we've had very strong cash performance, and this has provided us with resources to invest in growth while returning capital to our shareholders.

Our balance sheet remains strong with net debt of $86 million and total debt to adjusted EBITDA of 1.39 times. Capital spending in 2014 is planned at approximately $60 million. We'll complete some capacity expansion projects underway at film products and Bonnell, such as a new surface protection line in China, personal care in India, our flexible packaging line in Brazil, and the new press in Newnan, Georgia to support the automotive industry.

2013 was our third consecutive year of cash from operations of greater than $70 million. Since 2009 we have made significant investments in growth with 70% of funding for those investments coming from cash generated from operations. Also in 2013, we've raised our quarterly dividend 16% to an annualized rate of 28%, and as Nancy mentioned this is our third increase in the last three years.

Also, as Nancy mentioned over the past four years we've allocated more than $85 million for share buybacks, quarterly dividends and special dividends. So we're delivering on our strategy. Our strong cash performance has enabled us to both invest in growth and return capital to shareholders. In 2014 we had the financial strength and flexibility to continue to do both.

With that I'll turn it back to Nancy.

Thanks, Kevin. As we move the agenda towards our outlook for 2014 and beyond, I want to get a bit more specific about the growth expectations for our key markets. We are playing in attractive markets, and the growth rates in our markets give us confidence that we are pursuing the right strategy.

As you would you say expect, the estimated CAGR of 4% for feminine hygiene products and 5% for baby diapers are driven by the demographics in emerging markets as new users increase demand for these product. We have the right footprint to participate in this growth with plants in Brazil, China, and India. And we are adding capacity and capabilities in those plants in response to our customers' needs for local supply and service in those emerging markets.

In developed countries the aging population is driving demand for adult incontinence products and the forecasted global growth rate of 8% through 2017. We have been serving this market for some time and are excited about the growth in how the products we offer help our customers deliver on the performance attributes needed to meet consumers' expectations. With expected growth through 2017 of 16% per year for mobile devices like tablets and smartphones and increasing average panel sizes of TVs we are well suited to meet the increasing demand for high quality surface protection film.

Higher fuel efficiency standards are increasing the use of lightweight aluminum extrusions in vehicles with growth in aluminum content expected to outpace the overall growth rate of new automobiles. We are in the early part of the demand curve, and I'm very pleased with how quickly we translated the identification of this trend into a meaningful growth driver for Bonnell.

Packaging innovation and economic development in Latin America are driving demand for flexible food packaging, and we will benefit once the supply/demand cycle for PET film rebalances over the next three years. Our optical management products still represent a relatively smart portion of our volumes, but our innovate products have strong traction in the fast growing LED and energy efficient lighting market. We also expect that a continuing strengthening of the North American non-residential building and construction market will provide additional volume growth for Bonnell.

Not only should these growth trends fuel top line and bottom-line growth for Tredegar, but over time the continued market and customer diversification that will come with the growth should temper the impact of the cyclical nature of some of our markets.

We know that we're going to be a little slow coming out of the block in 2014. In film products, volume slowed for our surface protection films in the fourth quarter of 2013. And we expect that dynamic to continue at least through the first quarter of 2014 with momentum returning in the second half of the year.

Like many businesses, the plants in the southeast and midwest are now experiencing operating disruptions and spikes in energy costs that will be difficult to offset entirely in the first quarter. We expect that the tough market dynamics for flexible packaging will continue through 2014.

Looking at the full year for 2014 we expect modest volume growth in film products despite the loss of certain North American baby diaper elastic laminate volumes. For Bonnell the ramp-up of the new automotive press through the year will be a meaningful contributor to volume growth.

We expect moderate growth in the non-residential building and construction market. And we expect volume increases in other non-construction segments as we continue to capitalizes on our expanded presence in industrial segments such as consumer durables and machinery and equipment. So in terms of performance targets, we expect film product volume growth of approximately 2% in 2014 resulting from the following dynamics.

Surface protection strength as new technologies continue to grow the electronics and display market especially in the tablet and smartphone segment. The start-up of our new flexible packaging line in Brazil will drive volume growth for our flexible packaging films. Although please keep in mind that as is typical in the PET film industry, it will be a number of years before demand catches up to the step change increase in capacity. And the growth for personal care products will be overshadowed by the loss of certain baby care elastic laminate volumes in North America.

I want to emphasize that we expect 2% volume growth in film products despite the loss of North American elastic laminate volumes. The actions we have taken to reduce customer concentration and broaden product capabilities are positioning us to absorb the loss of a meaningful piece of business. And although margins will remain in the high teens, we anticipate slightly lower margins in 2014 in film products due to the continued pricing pressure for our flexible packaging films and spending to support growth initiatives and for an ongoing litigation matter.

Bonnell's volume should grow approximately 9% in 2014. As I previously mentioned, a meaningful part of that volume growth will come from our new automotive press. And we do expect volume growth in our other end markets, albeit moderate growth from non-residential building and construction. Once again, the actions taken in executing our strategy position us for 9% growth with only moderate gains coming from non-residential building and construction.

Margins in Bonnell have increased appreciably over the last few years to almost 9%, and we expect this rate to remain stable in 2014. As for Tredegar's return on invested capital performance, we expect slightly lower returns in 2014 as a result of the new capacity investments that we have made, a large portion of which will come on-line during the year. We look at 2014 as another building year. We will be finishing up a lot of the capacity expansion projects and ramping up production during 2014 and into 2015.

Looking beyond 2014, as we drive for the returns on our strategic investments. In 2016 we expect to achieve a compounded annual growth rate of approximately 5% for film products and about 6% for Bonnell, with EBITDA margins of 18% for film products and 10% for Bonnell. We expect total company return on invested capital in the range of 11% to 12% and would expect to continue to improve on these financial metrics beyond 2016.

We are confident and committed to our strategy, one that focuses on our manufacturing capabilities and innovation. We believe that the actions we have taken in executing this strategy will drive sustainable long-term growth. At the same time, we continue to look for opportunities to return capital to our shareholders. Our overarching objective is to create shareholder value, and Tredegar's Management team is committed to doing just that.

And with that, we will open it up to questions. Operator, may we have the first question?

Excellent. At this time we would like to take any questions you might have for us today.

(Operator Instructions)

Your first question comes from the line of Robert Marshall with Davenport.

How are you guys today?

Hey, Rob.

Could you kind of give us a little more granularity on the automotive aluminum extrusion line and how fast it is ramping up, and when you expect it to be on-line, and what you expect the next couple of years to look like?

Well, it's coming on-line in the end of the first quarter, so we're that in process now. It will be ramping up over the course of 2014. And so 2015 would represent the first year of that line running at its full capacity.

Is the production spoken for at this point? Are you entertaining new customers? You commented that you were pretty pleased with the uptake.

Yes, we are. We've gotten -- as I said, we've gotten really a lot of inbound calls and interest in that line. We absolutely fully expect that we've got volume to fill that line in 2014, and we continue to be looking at additional customers and additional opportunities beyond that.

Okay. The second question, can you kind of give us a little bit more detail in terms of what you are seeing down in Brazil at this point? Do you think the situation has stabilized, pricing stabilized, and do you anticipate any issues kind of ramping up the lines here over the next couple of years?

Again, we believe we're at or near the bottom of the down cycle. We are putting in -- the way this business works is that you do put in large increments of capital, and so it will be a number of years before that capital will be fully absorbed by the demand. We knew that going into it. That's just the nature of that equipment.

All right. But you're pretty confident things are on track there, and you don't anticipate any big issues?

Yes, we are expecting a smooth start-up and ramp-up of that line. But again, I just want to make sure everybody keeps in mind that it will -- I mean, we're putting in more capacity than the demand in order to make sure that we have adequate capacity to absorb that demand as that market continues to grow. We are the market leader in Brazil, and we are the only local producer in Brazil of PET film.

Okay. Kind of last question here. Are you seeing any signs of a pickup in your non-residential Bon L business at this point? You sounded a little bit optimistic there when you were making the presentation. If you are optimistic, what's leading you to believe that things are picking up? Is it customer feedback, or just the overall outlook for non-residential?

Well, we have seen some pickup in consumer durables and transportation, I believe, but -- and it's typical of what we would expect for this industry, with this acquisition that we've made. So we've had a nice diversification. We do see some modest pickup there, and we look forward to growing that.

All right.

But on the non-residential building and construction, basically there's industry forecasts out there, and we're expecting in 2014 that we'll maintain our market share and be able to participate with any growth -- with the growth that's currently being estimated for building and construction. It's around I think 4.5% for 2014.

All right. Great. Thank you very much.

Great. Thanks, Rob.

(Operator Instructions)

Your next question comes from the line of Justin Bergner with Gabelli & Company.

I guess, the guidance for Bon L Aluminum is for margins to be at or perhaps slightly below 2013 levels, if I'm doing my math correctly. And I just wanted to get a sense as to, if that relates to start-up costs for your automotive line, and potentially why can't the fourth quarter run rate of profitability in Bon L be maintained into 2014?

Hi, Justin. Thanks for the question. I think for Bon L, the product mix we have is toward mill finish, so ultimately it's an unfavorable product mix. The aluminum we expect to be about flat year-over-year.

Obviously we would look to move toward -- out of mill finish shapes into other value-add services. But when you look at 2014, we expect that margin to be relatively flat. We're pleased with the addition of AACOA, where we have fabrication and other services that we can bring to the party to improve those margins. But for the year-over-year, we're going to be essentially flat.

Okay, great. Two other questions, if I may. It doesn't seem like the lineup is too long today. First off, beyond 2014, would you sort of be comfortable speaking to where CapEx should settle down towards?

Well, I certainly will speak to that. Our CapEx, basically for the return on invested capital that you see in 2016, the significant CapEx is already in place, or well underway. We've discussed it for some time.

So we see CapEx ramping down in a meaningful way in 2015 and 2016. I'm not comfortable giving numbers but we're at $80 million in 2013, we'll be $60 million in 2014. We expect to be quite a bit lower for 2015 and 2016.

Okay, thank you for that clarity. And then finally, with respect to sort of non-segment costs, which I believe includes your pension costs, are there other puts and takes that one should be thinking about as one sort of models non-segment costs looking into 2014 versus 2013?

I think the biggest item is the continued 13 D expense. We'll see another $1 million to $2 million on that. That will be -- but I don't see -- the biggest thing is pensions. We will see '13 be expensed. It could be a little bit more than 2012 -- excuse me 2013, but not a lot.

Okay, so we should expect most of the decline in pension expense to carry through to a decline in corporate overhead? Is that a safe assumption?

Yes.

Okay. Great. And what sort of concerns -- what sort of concerns you on the film products business going forward? Obviously, you want to talk about the positives and the parts of the business that are turning up, but what gives you continued concern as you look into the future?

I think that -- I think we've -- I mean, the only thing I would say is, obviously, as we've mentioned, we do have challenges, continue to have challenges with the market dynamics for our flexible packaging business, and that's going to continue. And as we said, we've put in this slug of capacity, and it is going to take some time to absorb that. Other than that, we -- you encounter the normal ups and downs that you have in the emerging markets. We've described that.

So again, over the long term we think that we're going to benefit from that, but there could be some stops and starts there. And then the other dynamic that does play out for us from time to time is in surface protection, where we do see a cycle.

The one thing that I can say is that up to this point, each time we've seen that downturn in the cycle we've always come back with higher demand and more volume. So I think those are the normal dynamics that we have in our films business.

Okay. Thank you very much and good luck going forward.

Great. Thanks. Appreciate your calling in.

(Operator Instructions)

And you have no further questions. I will now turn the call back over to Ms Nancy Taylor for any additional or closing remarks.

Well, I would like to thank you all for joining us today. In 2013, we continued to strengthen our foundation for growth, and we look forward to demonstrating further progress against our strategy in the year ahead. Thanks again for listening in.

Thanks to all our participants for joining us today. We hope you found this webcast presentation informative. This does conclude our webcast. You may now disconnect.