Nov 11, 2008
Operator
Good day and welcome to the Buckeye Technologies Incorporated First Quarter Earnings Results Conference Call. Today’s call is being recorded.
Presently all parties participating in this call will listen to opening remarks made by the Company. After the prepared remarks Buckeye management will analyst’s questions.
At this time for opening remarks and introductions I would like to turn the conference over to Daryn Abercrombie, Senior Finance and Investor Relations Manager. Please go ahead, sir.
Daryn Abercrombie
Thank you, Curin. Good morning and welcome to Buckeye’s conference call commenting on our results for the July to September quarter of 2008, our fiscal 2009 first quarter.
Today, I am joined in this call by John Crowe, Chairman and Chief Executive Officer; Kris Matula, President and Chief Operating Officer; Steve Dean, Senior Vice President and Chief Financial Officer; and Beth Welter, Vice President and Chief Accounting Officer. After John and Steve make some introductory remarks we will respond to your questions.
Before we get started, however, I’d like to remind you that matters in this call include forward-looking statements that involve risks and uncertainties that may cause the Company’s actual results to differ materially from those projected in such forward-looking statements. For further information on factors that could impact the Company and statements contained herein, please refer to the slides accompanying this presentation as well as the Company’s most recent Annual Report on Form 10-K and quarterly report on Form 10-Q.
John?
John Crowe
Thanks Daryn. Good morning.
Buckeye had a good quarter considering all that is happening in the world during these uncertain economic times. We stated in August conference call that demand for our Specialty Fibers remained strong and that continued to be the case in the just completed quarter.
We anticipated that in the July-September quarter would be similar to our April-June quarter with improved operating performance, offset by a higher tax rate. We shared our plans to focus resources on improving performance at our Florida wood facility and increasing our Nonwovens’ North American volume.
Both paid off during the just completed quarter. Our Florida wood facility’s operating performance improved and our Nonwoven sales volume returned to the level we expected.
Net sales for the July-September quarter grew by 12% over the prior year to $221 million, a new quarterly record. Net income for the quarter was $8.9 million, $0.23 per share, compared to t April-June quarter net income of $9.3 million, $0.24 per share, and $13.5 million, $0.34 per share for the same period a year ago.
In the year ago quarter, $0.06 of the $0.34 were due to a favorable tax adjustment in Germany. Steve will cover the numbers in more detail during the earnings reconciliation.
Increased selling prices across all of our businesses including a surcharge on wood specialty products implemented in July helped to offset significantly higher raw materials, energy, chemicals, and transportation cost that began at the start of 2008, escalating each quarter. Year-over-year, increases in these items has negatively impacted our gross margin.
We are pleased with the Nonwoven sequential improvement in sales and operating revenue, but with operating income of $3.6 million we still have a significant gap compared to the Nonwoven’s record operating income of $8 million earned in the July-September period last year. The combination of escalating input cost and the reduction in Nonwoven’s capacity utilization resulted in a year-over-year gross margin decline from 20.6% of sales to 16% of sales in the just completed quarter.
However, it is up from the 15.2% gross margin generated in the April-June quarter. Due to the unprecedented cost escalations we have experienced over the past nine months, in September, we announced and implemented additional price increases of $50 to $75 on cotton specialty products, and a $50 per ton increase on our wood specialty product surcharge effective October 1st.
Now, our wood specialty surcharge is $100 per ton. While oil and natural gas prices have moderated, our cost of raw materials, including wood and some chemicals continue to escalate.
It will take time for these costs that have started to decline to reach our bottom line. Now, Steve will review the supplemental reconciliation charge that we included in our press release.
Steve.
Steve Dean
Good morning. I would like to refer you to the supplemental slides that we’ve provided with the webcast this quarter and on the Company’s website and provide you with some further explanations behind our financial results for the quarter.
I plan to focus my comments on comparing our results for the July-September quarter to the April-June quarter, but we have also included several slides with comparisons against the year-ago quarter in the appendix, for your reference. Starting with Slide number three, you will see a consolidated earnings summary comparing our earnings for the just completed quarter to the April-June quarter.
Operating income improved by $2.9 million compared to the April-June quarter. This improvement was primarily driven by increased sales volume, and improved capacity utilization in the Nonwoven Materials segment as we start to gain back some of the volume that was lost in January in North America.
Nonwoven sales were up $4.1 million over the April-June quarter as shipment volume was up 9%. Operating income for Specialty Fibers was down slightly in spite of higher prices on our specialty wood and cotton products, and improved performance at our Perry Florida specialty wood fibers facility, because of higher cost for raw materials, chemicals, energy, and transportation costs, compared to the April-June quarter.
Turning to the waterfall chart on Slide four, you can see that earnings per share of $0.24 [ph] were only down by $0.01 compared to the April-June quarter, in spite of a higher tax rate, which had an earnings impact of negative $0.04 and a negative $0.02 impact in other expense due to foreign exchange loss. Slide number five shows in a little more detail the drivers behind the increase in operating income from $19.7 million in the fourth quarter of fiscal 2008 to $22.7 million in the first quarter of 2009.
You can see that while higher selling prices added $6 million to operating income for the quarter, higher prices for chemicals, energy, cotton linters, and other raw material cost had a negative impact in total of $7.6 million, for a net income reduction of $1.6 million. What drove the quarter-to-quarter increase in operating income was higher production and sales volume, which added $4.1 million to income in the quarter.
About half of this improvement was due to the increase in Nonwoven’s volume and the other half is due to running (inaudible) during the quarter, which allow us to increase our production by about 7000 tons over the preceding quarter. Finally, moving to Slide six and seven, I wanted to talk a little bit about Buckeye’s leverage and interest coverage ratios, our debt maturity schedule, and our liquidity position.
We have two financial covenants in our revolving credit facility, which are shown on Slide six. They are a leverage ratio and an interest coverage ratio and we are in compliance with each by a large margin.
The leverage ratio, which is consolidated debt divided by adjusted EBITDA for trailing 12 months, and we are required to keep this ratio below 5.25% until the quarter ending June 30, 2008, when this requirement drops to 4.50%. As of September 30th, 2008, this ratio for Buckeye was 2.67%.
The other ratio in our financial covenants and the credit facility is a interest coverage ration, which is adjusted EBITDA for the trailing 12 months divided by interest expense. We are required to keep this ratio above 2.0%.
As of September 30th 2008, this ratio for Buckeye was 4.77%. On Slide number seven is a chart showing Buckeye’s debt maturity schedule.
As you can see, our earliest debt maturity is two years from this month when the remaining $115 million outstanding on our Senior Subordinated Note is due on October 15th of that month [ph]. Our $200 million revolving credit facility matures on – in July of 2012, and our $ 200 million in Senior Notes matures in October, 2013.
I would also like to point out that as of September 30th, we had $117.9 million of borrowing capacity available on our bank revolver in addition to $18.5 million in cash. We believe that we are in a favorable position right now with no debt maturities for the next two years, which gives us plenty of time to plan our refinancing options, which would include using the additional borrowing capacity freed up by using our free cash flow to continue paying down our revolver over the next two year to retire the 2010 notes when they come due.
Now, I’ll turn it back over to John Crowe.
John Crowe
Thank you, Steve. In this current challenging environment with the possibilities of global recession and volatile cost swings, we are very disciplined – we will be very disciplined in our use of capital.
We have reduced our debt significantly over the last several years and our balance sheet is much improved. We will continue to focus on debt reduction, and we are not satisfied with debt just below $400 million.
We’d like to drive the balance sheet debt down closer to $300 million while continuing to focus on low-risk, high-return capital uses like our Foley wood facility energy project. Our long term debt is financed at reasonable rates and our credit facility, which is does not mature until 2012, is backed by what we believe is a strong and stable group of banks.
We have no immediate refinancing needs or maturity. When we need to borrow money in the normal course of operations, we are able to do so at reasonable rates.
The weak economy should bring some relief to the very high prices we have experienced for energy, chemicals, raw material, and logistic expense, restoring margin. But that will take some time to flow through.
This makes our focus on lean enterprise methods all the more crucial as we continue to work to reduce cost by eliminating waste throughout our operations. The priority for our near term growth is to focus internally and fill up our current assets with high-value product mix.
We can do this maximizing our efforts to enter new markets with new products. The strengths in our business, going forward, will be, first, continued health of our wood specialty markets.
Buckeye’s business benefits from serving a high-end diverse set of end use applications. This diversity allows us not to be too highly dependent on any one customer.
Next, continuing improvement in North America Nonwoven’s capacity utilization will be important. Also, maintaining our strong balance sheet and continue to pay down debt is a strength.
And finally, stable raw material supply including, linters is a strength for us. The watch out in our business will be a severe recession that could soften demand for our products.
Again, we believe the diversity of our sales mix, and strength of our specialty markets will help minimize the impact on our business, a stronger U.S. dollar, which could reduce our competitiveness and a final watch out is fluff pulp pricing.
I believe that all of our efforts in the recent years to reduce debt, improve our product mix, take out cost, and to put a new credit facility in place in July, 2009, has positioned us well to deal with a global economic slowdown. Based on the current economic uncertainty, we expect the October-December quarter earnings per share to be down slightly from the just completed quarter.
We will benefit from our October 1 specialty wood surcharges, and cotton price increases. While we expect lower energy cost, chemical and wood cost will be higher.
Finally, with an emphasis on maintaining and improving the strength of our balance sheet and a focus on cash generation, we will live within our means. While we have limited ability to influence worldwide economic conditions, we can stay focused on the fundamentals of our business and the things that we can control.
And that’s what we plan to do. That concludes our comments.
Curin, I’d like to turn it back over to you for the question-and-answer period.
Operator
Yes, certainly, sir. (Operator instructions) And we’ll take our first question from Gail Glazerman with UBS.
Gail Glazerman
Hey, good morning, John, Steve.
John Crowe
Good morning, Gail.
Steve Dean
Good morning.
Gail Glazerman
I guess just looking at your three kind of (inaudible) you just mentioned struggling [ph] with demand, can you talk a little bit about the trends of any change in trends you’ve seen over the last month since the financial crisis really accelerated and in your key end markets?
Kris Matula
Sure, Gail, this is Kris. As John mentioned, we are fortunate, we benefit by serving high-end niches with a diverse set of end use applications and sell our products around the globe.
So this diversity does allow us to not be too highly dependent on any one customer end use application or geography. And so, the demand to-date that we’ve seen for the majority of our products remained strong.
Now even though we benefit from this diversity, out business isn’t immune to a global economic slowdown. And we have seen a few instances where customers are doing some modest reductions in their volume expectations.
In these circumstances, we’ll need to replace the volume with other opportunities. That’s particularly true in our wood specialty business or we’ll match our production levels to meet a lower demand expectation and as you know we’ve long flexed our operating schedule both at our Nonwovens facilities and our cotton to match supply with demand.
And so, again, to-date we continue to see very strong demand for the majority of our products, but sure there are a few instances and situations here and there and we’ve probably seen more softness in our cotton products than any other area whether it be in the cotton paper application and even a little bit in Americana from that standpoint. But in general, we are seeing – we still are seeing good demand and that includes in the fluff pulp areas.
Gail Glazerman
Right. Okay, let’s just taking on that last comment, can you talk about what you are seeing in terms of fluff pulp’s relevance to prices declining?
John Crowe
Well, as you know, recently there was a pricing reduction announced by a large supplier effective, I believe, November 1st, and we are starting to see some downward movement in our fluff pricing, but, as Kris said, the demand is still strong, so our key certainly demand.
Gail Glazerman
Okay. And I guess just looking at the Nonwovens business, you did certainly a lot better than I was expecting.
Is that just moving up the learning curve faster than you might have expected with the new business you’ve taken on, if you’ve taken on kind of incremental business beyond what you’ve discussed in the past? Is (inaudible) kind of any other large new business to replace what you lost last year?
Can you talk just a little bit about what drove the improvement in the quarter?
Kris Matula
Yes, Gail, this is Kris. Again, we’ve talked about the fact that we were in the process of replacing the lost business that we had.
We continue to make progress in replacing that lost business. We probably replaced 60% of what we’ve lost in North America and further along than that in Europe.
And so as we continue to fill that up and we’re – we will be looking for our earnings to continue to rebound. And so I think there is – we certainly see as we look out several quarters that we’re going to continue to look to build our business.
Gail Glazerman
Okay. And just last question on the cost side.
Maybe looking beyond the fourth quarter or the first quarter and out into the rest of the year, can you talk a little bit about some of the key cost items and what changes you would expect, and what trends you are seeing now in terms of chemicals and wood, and if you think that some – what you are seeing now is short term right – would expect to see a change in a quarter or two?
Daryn Abercrombie
Yes, Gail, this is Daryn. We expect that we’ll see a slight increase in wood prices over the first quarter.
Wood prices are actually up 3.1% from the fourth quarter and 10.4% year-over-year and again, this is mainly due to higher stumpage cost as a result of Tropical Storm Fay, which should offset any favorable diesel impact. So, that’s in relation to wood.
Steve Dean
I mean we are seeing cost – prices go up quite a bit still in the October-December quarter compared to the one that we just saw. We ought to see natural gas and fuel prices coming down especially at our airlaid sites and our Memphis plant.
And in the case of Foley, you remember that we can switch back and forth between fuel oil and natural gas there. So that tends to level out the prices over a quarter, so more than you would expect by just looking at the spot prices.
And I think the other thing that I think we’ll start to see is cotton linter prices ought to start to moderate, going forward.
Gail Glazerman
Okay. And just looking at this, in terms of caustic I mean is there any sign that that’s leveling out or I mean will there be any hope for that or do you expect that trend just to stay where it is?
John Crowe
I would say the caustic is leveling out. And of course it – that’s – it’s dependent upon well – can you sell the chlorine as the co-gen product there and certainly if housing market or construction picks back up, we would expect that then caustic would stabilize and then may be come back down.
Gail Glazerman
Okay. And wood, is the key driver right now is higher stumpage do you say, I mean presumably the land will dry out at some point in the foreseeable future and then you’d expect to see a pretty healthy decline with diesel prices still falling?
John Crowe
It always has before dried out and get – or they can obviously harvest on (inaudible) they can harvest on right now, they are in flooding conditions.
Gail Glazerman
Okay. Great, thank you.
John Crowe
Thank you, Gail.
Operator
And moving on to Nap Overton with Morgan, Keegan.
Napoleon Overton
Yes, good morning.
John Crowe
Hello, Nap.
Steve Dean
Good morning, Nap.
Napoleon Overton
Just a couple or three things. Back in the Nonwovens segment, so operating income was back to $3.6 million, below $8 million in the year ago quarter, but if I remember right, that was your peak quarter and year ago quarter there for the Nonwovens segment and most recent quarter has been in the kind of $4.5 million to $5 million, a number of recent quarters in the $4.5 million to $5 million ranges.
Is that your kind of near term target or have you maxed out until you replace additional volume or what’s the near term outlook there?
Kris Matula
I – Nap, clearly, we are not satisfied with the level of performance that we are currently earning in the Nonwovens business. So if we look out a couple of quarters, we are expecting things to continue to improve.
Now, we’ve had – there is some risk in the O&D quarter where some of our customers take down for Christmas that we – you probably won't see an increase from this quarter to that quarter. But as we look out, yes, we certainly expect to get our earnings back to where they were in the $4 million to $5 million level, but we need to get them back to where they were in the $8 million level.
So, I think we are going to continually to grow our volume and fill up our sites and we see that happening as we look out over the next several quarters.
Napoleon Overton
And the customer that you added that helped boost the results this quarter, if I remember right, you said replaced roughly 60% of the lost volume from the lost customer earlier in early calendar 2008. And any progress on identifying additional places to use and improve capacity utilization there?
Kris Matula
Yes, I think, Nap, we have – we are working to replace that lost volume with a number of our customers and we’ve had success with several customers.
Napoleon Overton
Okay, alright. And then probably a question for Steve, the effective tax rate here was finally 38.5%, which I think is what you’ve been saying for years as a reasonable assumption but it never has reached that level.
What do you expect tax rate to look like for the full year?
Steve Dean
Nap, we are expecting the tax rate for the total year to be about 35%. Its’ awful hard to predict one-time benefits that you find along the way, but it’s going to come down over the year because we are expecting improvement in the profitability of our Americana operation.
And we’ve been able to take no tax benefit against that in the past. So, I see the rate coming down over the course of the year and averaging now at about 35%.
Napoleon Overton
Okay. And then did I see on your presentation on the Web that you bought back 54,000 shares during the quarter, is that correct.
John Crowe
Yes, that’s right.
Steve Dean
That’s right.
Napoleon Overton
And so my question is what would it take for you to make a meaningful bet and repurchase of a substantial slug of stocks at these depressed levels?
John Crowe
Well, this is John. We are not taking anything off the table.
Certainly, we are going to be mindful of cash management and use our cash wisely and maintain our liquidity. So that’s something we’ll look at.
We have room to move on that if shareholders approved. A sizable opportunity to buyback and we are just going to use it wisely and put it in with our cash management strategy.
Napoleon Overton
Okay.
John Crowe
Steve, you want to add anything to it?
Steve Dean
I mean I think what I would say is with the economy the way it is right now, we are really interested in managing our cash flow and preserving our liquidity. So, I guess I personally would say we are not likely to make any sizable buybacks of stock any time soon.
John Crowe
We never say ‘never,’ but lot of money to repurchase stock probably not given these credit conditions it is not the best thing to be doing.
Steve Dean
We have some important capital projects we are working on like we’ve talked about the Foley Energy Project, which has very good paybacks, so we want to make sure we have adequate cash available to complete that project and other ones that we are working on.
Napoleon Overton
Okay. And then last quarter you talked a little bit about a strategic group that you had kind of begun to focus on about – reading into that the opportunity to perhaps make some acquisitions or make some investments outside your current business line and so forth.
Would you say that your propensity to do that, really pursue that aggressively has increased or decreased within the last eight weeks?
John Crowe
I will say decreased and goes kind of along with the answer to the previous question.
Napoleon Overton
Okay.
John Crowe
We are going to watch cash very carefully. That strategic growth team is still in place and it will continue to work on a long-term growth strategy for Buckeye, certainly if you remember, we shared three phase of that, certainly the focus will be on the internal phase and, as Kris mentioned, filling up our current unutilized capacity is probably the number one thing we can do to grow this business.
And so we’ll be focused on that. But that doesn’t mean the growth team is not going to continue to look at what’s the right long term strategy – growth strategy that is sustainable for Buckeye.
But again, given these uncertain times, cash management is critical to us.
Napoleon Overton
Okay. And then final question, and a kind of a follow-up, would you say that we have now reached a peak cyclical pricing for market pulp and fluff pulp during this cycle?
Are you comfortable in concluding that at this point.
John Crowe
I’d say our specialty market is different than the fluff market – end market so the specialty market is still is a tight market and there are – we still see upside in the specialty. The fluff market – you know we are a small player in the fluff market.
We have a good customer base. Given the volatilities we’ve seen in everything in the world lately, it’s hard for me to make a real prediction, but obviously with the large players announcing decreases you could say it probably has peaked and it took a long time to run up and I – this is my forecast, it won't run down real far and fast, but who knows.
Napoleon Overton
Okay.
John Crowe
I don’t have a better crystal ball than anybody.
Napoleon Overton
Thank you very much.
John Crowe
You are welcome, Nap. Thank you.
Operator
(Operator instructions) And we’ll move on to Mr. Bill Hoffman with UBS,
Bill Hoffman
Hi, good morning guys.
John Crowe
Hi, Bill.
Steve Dean
Good morning.
Bill Hoffman
Just two questions, the first one is, Steve, I wonder if you could just help us a little bit with your currency exposures and what you are doing to deal with the rapid strengthening we’ve seen in the dollar here on a relative basis, obviously it’s been backing off a little bit today, but we’ve made a big move, and may be some thoughts on how that impacts from a cash standpoint? And then the second question, I wonder John if you could just address Americana and the cotton markets and how that operation is working down there.
Steve Dean
Alright, Bill, I will take your question on the foreign exchange. Where that affects us on a going basis is at our foreign plants, obviously.
In Americana a strengthening dollar is helping us quite a bit. You know for every 10 basis point increase in the Brazilian reai – U.S.
dollar exchange rate, we benefit by about $1 million a year in earnings because of lower cost.
Bill Hoffman
Okay.
Steve Dean
I mean that goes down as you get higher, but it’s something like for – a million of every 5% or 6%. Canada, we also benefit with a weakening Canadian dollar with our airlaid plant there.
For every 10 basis points it’s almost $2 million a year. The Canadian dollar, yes, it’s been strengthening quite a bit – not quite at the rate of the – or it’s been weakening quite a bit, not at the rate of the Brazilian reai.
Steinfurt plant, you know, that’s really a – we sell into the European market for the most part, so it’s a euro – sales are in euros, the costs are in euros, so what we really see there is that the translation of gross margin in euros to dollars is a hurt for us of about $2 million a year for every 10 basis points. So, you could say that the – Canada and Europe offset each other and Americana is a benefit, big picture.
Is that what you were looking for?
Bill Hoffman
Absolutely. Thank you.
Steve Dean
Okay.
John Crowe
Hey, Bill, let – I am going to ask Kris to answer Americana for you. Okay?
Bill Hoffman
Thank, yes.
Kris Matula
Yes, Bill, if you look at Americana, certainly a number of factors going on. Steve just mentioned the change in the reai, which is a positive benefit from a cost standpoint down there so that to help is a factor.
As we look at our cost for our raw materials, our linters, we are having – those prices are declining some. So that’s also another positive factor from that standpoint.
And we’ve continued to operate that facility where we will produce – to make orders and so – as I mentioned, this quarter, we’ll probably have a little less production than we have had in the quarter we just completed based on that. But as we look forward, we see some improving trends in that business, so our key will be able to hold on to those and improve the performance of that facility.
Bill Hoffman
Have you – thanks, Kris – have you been able to source linters from other sources? I know we were having a shortage problem there for a while.
Kris Matula
Yes, I think we have – we prefer to be able to source linters locally. So in Brazil we’d like to get them from South America and that’s really where we get all of our Brazilian linters from.
In North America, we do have to import a small amount of our lint and so – but obviously the cost of that fairly significant and so I think our raw materials supplies, I’d probably characterize it as stable at the moment.
Bill Hoffman
Great, thank you.
John Crowe
Thank you, Bill.
Operator
And there are no further questions at this time.
John Crowe
Okay, Curin. Thank you very much.
We appreciate people calling in and listening to our conference call and we look forward to our next conference call in January with you where we can share results of O&D quarter. Thank you for your time this morning.
Operator
And again, ladies and gentlemen, that does conclude today’s conference. Thank you for your participation and have a wonderful day.