Earnings Transcript for TG - Q4 Fiscal Year 2013

Start Time: 17

Executives: Neill Bellamy – Investor Relations and Corporate Communications Nancy M. Taylor – President and Chief Executive Officer Kevin A. O'Leary – Vice President, Chief Financial Officer and Treasurer

Analysts: Robert R. Marshall – Davenport & Co. LLC Justin Bergner – Gabelli & Company

Operator: Good day and welcome to the Tredegar Corporation 2013 Annual Financial Results Webcast. My name is Ryan and I’ll be your web event specialist today. If you would like to view the presentation in a full screen view, click the full screen button in the lower right hand corner of your screen. Press the escape key on our keyboard to return to your original view. And finally for optimal viewing and participation, please disable your pop-up blockers. Should you need technical assistance as a best practice we suggest you first refresh your browser. If that does not resolve the issue, please click on the support option in the upper right hand corner of your screen for online troubleshooting. It is now my pleasure to turn the webcast over to Neill Bellamy with the Tredegar Corporation.

Neill Bellamy: 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 reconciliation on our website under the investors 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 that 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 reconciliation’s related to any non-GAAP financial measures discussed today maybe found in the slides accompanying this presentation and our supplemental materials on our website. With that I will turn it over to Nancy Taylor.

Nancy M. Taylor: Good afternoon, I am 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 initiative. 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 will share our view of market dynamics for the coming year and comment on our outlook for 2014.

: In early 2010, we took stock of Tredegar’s strength and vulnerabilities. On the vulnerability side, we were struggling to realize sustained top line growth and our businesses had heavy customer and market dependence. We also recognized our many strength, which include a strong track record of manufacturing excellence, leadership positions, and 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 pursuit organic and inorganic growth to reduce our customer and market concentration. We are fortunate that we participate in markets with favorable trends and that we have deep knowledge about those markets. Our knowledge of our market also allowed us to identify near term challenges, which in turn under support the need to pursue additional markets with attractive growth trends, where our strengths would be in assets. An example that we know that 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 most of the developed countries with the growth rates for those products are higher. We made those investments 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 emerging markets to remain a leader in personal care and to participate in that growth opportunity.

: I hope this context around our strategy has been helpful. We are committed to our strategy and has the next two slides illustrates, 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 an 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 a new market also with attractive growth trends, such as lighting, automotive, and value-added fabricated aluminium products. We have taken action to 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 dividend, which we’ve 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 Bonnell, 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 introduction. Profitability as measured by segment operating profit was $10 million higher in 2013 and 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 Products 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. This severity of the down part of this cycle has been worsened by the economic slowdown in market such as China, India, and a particular importance to our business Brazil. So to be clear, while we expected the down cycle, it hasn’t 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 at 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 mill finish product to get back 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 with value added fabrication capabilities and market diversity. The acquisition integration process has gone well and we are implementing the best to both companies across the entirety of the Bonnell organization. For film products, I want to emphasize the positive customer response to our new product introductions which contributed to the strong demand for our surface protection and personal care materials in 2013. We’re also excited about the market pull Bonnell has experienced following the announcement of our investment in a new process to serve the automotive market. I’ll now hand it over to Kevin, who will cover our 2013 results in more detail.

Kevin A. O'Leary: Thank you, Nancy. I’ll 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 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 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 and roughly $7.5 million due to a 78 basis point increase in our discount rate and our initiative to fully free our defined benefit plan. In the second half of 2013, we incurred $1.4 million or approximately $0.03 per share and spending related to our response to a Schedule 13D 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 and income from ongoing operations was 31% compared to 26% in 2012, the increase which was driven by geographical income mix had an earnings per share of impact of approximately $0.08 per share. In 2014, we expect the effective tax rate in the range of 32% to 33% with the year-over-year increase also driven by geographical income mix. Overall in 2013, non-cash pension expense 13D related spending and the change in effective tax rate for income from ongoing operations had a $0.22 impact on earnings per share from ongoing operations. And 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 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 the facility in Brazil has been a bigger challenge than anticipated. We put a lot of attention of Brazil in the last few months we’ve competed for talent effectively with a number of other growing companies in Northern Brazil. Also plant hiring and training of staff for the new production line in Brazil is ramping up. The facility expansion is complete and equipment installation is well underway. We look forward to the start up of the lines during the second quarter of 2014. For the full year in some 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 smart phones, support. Our quality and reliability support our customers as they address increasing demands in this industry. Personal care sales increased 4% as new products gain traction in 2013. The overall Film Products delivered an increase in operating profits from ongoing operations compared to 2012, as strength and 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 pass-through of lower average aluminum prices. The impact on operating profits 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’ve 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 on 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’ve reduced our concentration in non-residential building and construction in 2013 to 60% compared to 70% in 2012. While the growth in 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 a benefit of lower spending for supplies and maintenance. Couple of others highlights, financial highlights for 2013. As you look at some of these numbers I want to remind you that we have had very strong cash performance and this has provided us with resources to investing 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 will complete some capacity expansion projects underway of some products in Bonnell such as a new surface protection line in China, personal care line 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 have raised our quarterly dividend to 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 have allocated more than $85 million for share buybacks, quarterly dividends and special dividends. So we are delivering on our strategy. Our strong cash performance has enabled us to both investing growth and return capital to shareholders. In 2014, we have the financial strength and flexibility to continue to do both. With that I will turn it back to Nancy.

Nancy M. Taylor: 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 expectation for our key markets. We are playing in attractive market and the growth rates in our markets give us confidence that we are pursuing the right strategy. As you would expect the estimated CAGR of 4% for feminine hygiene products and 5% for baby diapers are driven by the demographics and emerging markets as new users increased demand for these products. We have the right footprint to participate in this growth with plant in Brazil, China and India and we are adding capacity and capabilities in those plants and respond to our customers needs for local supply and service in those emerging market. 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 sometime and are excited about the growth and have products to offer help our customers deliver on the performance attributes needed to meet consumers’ expectation. With expected growth to 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 films. Higher fuel efficiency standards are increasingly used of light-weight aluminum extrusions in vehicles with growth and aluminium content in vehicles 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 without quickly retranslated 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 few years. Our optical management products still represent a relatively small portion of our volumes, but our innovative products have strong traction in the fast-growing LED and energy efficient lighting market. We also expect that a continuing strength – 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 blocks 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 plants in the Southeast and Midwest are now experienced operating disruptions and spikes in energy cost that will be difficult to offset entirely in the first quarter. We expect that the tough market dynamics in 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 volume. 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 capitalize on our expanded presence in industrial segment such as consumer durable and machinery and equipment. So in terms of performance targets, we expect Film Products 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 startup of our new flexible packaging line in Brazil will drive volume growth for our flexible packaging films. Although please keep in mind that as this 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 a high teens, we anticipate slightly lower margins in 2014 in some 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 moderate gains coming from non-residential building and construction. Tredegar and 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 heavy low returns in 2014, as a result of the new capacity investments that we have made, a large portion of which will come online 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 21% 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 or drive sustainable long-term growth, at the same time we continue look for opportunities, return capital to our shareholders. Our overarching objective is to create shareholder value and Tredegar’s management team is committed to doing job that. And with that we will open it up to question. Operator may we have the first question.

Operator: (Operator Instructions) Your first question comes from the line of Robert Marshall with Davenport.

Robert R. Marshall – Davenport & Co. LLC: How are you guys today?

Kevin A. O'Leary: Hi, Bob.

Nancy M. Taylor: Bob.

Robert R. Marshall – Davenport & Co. LLC: Could you kind of give us a little more granularity on the automotive aluminum extrusion line and how fast it’s ramping up and when you expect it to be online and what do you expect the next couple of years to looks like?

Nancy M. Taylor: Well, it’s coming online in the end of the first quarter, so we’re in that process now. And we’ll be ramping up over the course of 2014. And so 2015 would represent really the first full year of that line being at, it’s running at its full capacity.

Robert R. Marshall – Davenport & Co. LLC: All right, and is the production spoken for at this point, are you entertaining new customers and you commented that you were pretty pleased with the uptake?

Nancy M. Taylor: 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 volumes to fill that line in 2014 and we continue to be looking at additional customers and additional opportunities beyond that.

Robert R. Marshall – Davenport & Co. LLC: Okay. 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, you think the situation stabilized, pricing stabilized and you anticipate any issues kind of ramping up the lines here over the next couple of years?

Nancy M. Taylor: Again, we believe we’re at or near the bottom of the down cycle. We’re putting in the way, with 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 a nature of that equipment.

Robert R. Marshall – Davenport & Co. LLC: All right. You are pretty confident things were on track there and don’t anticipate –paid any big issues?

Nancy M. Taylor: Yes, we’re expecting a smooth start up and ramp up of that line, but again I just want to make sure everybody keeps in mind that that it’ll, I mean, we’re putting in more capacity than the demand in order to make sure that we’ve 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.

Robert R. Marshall – Davenport & Co. LLC: Okay. Kind of last question here, are you seeing any signs of a pick-up in your non-residential Bonnell business at this point or you sounded little bit optimistic there when you’re making the presentation, if you’re optimistic what’s leading to believe, that things are picking up is it customer feedback or just the overall kind of outlook for non-residential?

Kevin A. O'Leary: Well we see, we’ve seen some pick up in consumer durables and transportation I believe, but and it’s typical as what we would have expect in this industry, so with this acquisition that we’ve made. So we had a nice diversification, we do see some modest pick up there and that’s we look forward to growing that.

Robert R. Marshall – Davenport & Co. LLC: All right.

Nancy M. Taylor: But on the non-residential building and construction, basically there is industry forecast 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.

Robert R. Marshall – Davenport & Co. LLC: All right. Great, well thank you very much.

Nancy M. Taylor: Great, thanks Rob.

Operator: (Operator Instructions) Your next question comes from the line of Justin Bergner with Gabelli & Company.

Kevin A. O'Leary: Hi, Justin.

Nancy M. Taylor: Hey, Justin.

Operator: And Justin was driven the question.

Nancy M. Taylor: Okay.

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

Justin Bergner – Gabelli & Company: Hi, again, I’m not sure what happened there, but you have a question or too I would like to ask.

Kevin A. O'Leary: Good, yes.

Nancy M. Taylor: Because I’m back.

Justin Bergner – Gabelli & Company: I guess the guidance for Bonnell 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 startup costs for your automotive line, and potentially why can’t the fourth quarter run rate of profitability in Bonnell be maintained into 2014?

Kevin A. O'Leary: Hi, Justin, thanks for the question. I think, for Bonnell 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 towards out of mill finish chased into other value-added 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 – for the year-over-year, we’re going to be essentially flat.

Justin Bergner – Gabelli & Company: Okay, great. Two other questions if I may it doesn’t seem like the line up is too long today, first off beyond 2014, would you sort of be comfortable speaking to where CapEx should settle down towards?

Kevin A. O'Leary: Well, I certainly will speak to that. So our CapEx basically for the return on invested capital that you’ll see in 2016 that the significant CapEx is already in place or well underway we’ve discussed for sometime. So we see CapEx ramping down in a meaningful way in 2015 and 2016, I’m not comfortable giving numbers but there are $80 million in 2013 will be $60 in 2014, we expect to be quite a bit lower for 2015 and 2016.

Justin Bergner – Gabelli & Company: Okay, thank you for that, clarity and then finally with respect to sort of non-segment costs which I believe includes your pension cost. Are there other sort of puts and takes, that one should be thinking about as one sort of models non-segment costs looking into 2014, versus 2013?

Kevin A. O'Leary: I think the biggest item is the continued 13D expense you will see another $1 million to $2 million. On that, that will be, but I don’t see there is not the biggest thing is pension we will see 13D expense that could be a little more than 2013.

Justin Bergner – Gabelli & Company: 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?

Kevin A. O'Leary: Yes.

Justin Bergner – Gabelli & Company: Okay, great and what sort of concerns – I mean what sort of concerns you on the film products business going forward. I mean obviously you want to talk about the positives and the parts of the business there are turning up, but what gives you continued concern as you look into the future?

Nancy M. Taylor: I think that, I think we’ve – I mean the only thing that I would say is obviously as we have mentioned, we do have challenges, continued to have challenges with the market dynamics for our flexible packaging business and that’s going to continue and as we said we put in this slug of capacity and it’s going to take sometime to absorb that, other than that, we – you’re encounter that normal ups and downs that you have in the emerging markets we describe that. So again we – over the long-term we think that we’re going to benefit from that. But they are 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 were 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 the cycle we always come back was higher demand and more volume. So and I think those are that normal dynamics that we’ve in our films business.

Justin Bergner – Gabelli & Company: Okay, well thank you very much. And good luck going-forward.

Kevin A. O'Leary: Thank you.

Nancy M. Taylor: Great. Thank you. I appreciate your comments.

Operator: (Operator Instructions)

Neill Bellamy:

:

Nancy M. Taylor: Well, I’d 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.

Operator: 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. Have a good day.