Apr 30, 2010
Operator
Good day, ladies and gentlemen. Welcome to the Buckeye Technologies Incorporated third quarter earnings results conference call.
(Operator Instructions) At this time for opening remarks and introductions I will turn the conference over to Mr. Daryn Abercrombie, Investor Relations Manager.
Daryn Abercrombie
Thank you, (Diane). Good morning and welcome to Buckeye's conference call commenting on our results for the January to March quarter of 2010, our fiscal 2010 third quarter.
Today I'm joined on 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 Doug Dowdell, Senior Vice President, Specialty Fibers. After John and Steve make some introductory remarks, we will respond to your questions.
Before we get started, however, I'd like to read our Safe Harbor statement. The matters discussed 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
Thank you, Daryn. Good morning.
Buckeye's third quarter results improved compared to the previous quarter, and significantly improved when compared to the same quarter last year. However, our results were good.
The organization had to overcome cold weather issues and related downtime early during the quarter at several of our manufacturing locations. As we reported yesterday, third quarter net income was $19.3 million or $0.49 per share including the benefits of the alternative fuel mixture credits and the investment tax credits, offset by restructuring cost and expenses associated with early extinguishment of debt.
Excluding the special one-time items, adjusted net income was $11 million or $0.28 per share. This was our strongest quarter, excluding one-time items since the October-December quarter in 2007.
Excluding the special items this quarter and in comparison quarters, our earnings per share for the just completed quarter of $0.28 compares favorably to earnings per share of $0.22 in the previous quarter, and $0.11 for the January-March quarter last year. We are encouraged with the continuous improvement and positive trends in our business, and the significant (changes) in year-over-year market conditions.
Net sales for the just completed quarter of $191 million compares to $172 million for the same period last year. $0.17 earnings per share improvement year-over-year was mostly due to increased shipment volume.
Compared to the second quarter, we benefited from improved demand for all our products, rising specialty and fluff pulp prices, and lower interest expense. We reduced debt during the third quarter by $17 million to $273 million, exceeding our fiscal year and target of $275 million.
Our cash position also increased by $6 million to $27 million. We expect to generate strong cash flow in the current quarter and should be in a position to be at or below our new $250 million debt target by the end of this fiscal year ending June 30.
Operating income from alternative fuel mixture credits carry over for quarter totaled $4.8 million. The AFMC credit expired at midnight, December 31.
You will note on our balance sheet an income tax receivable of $74.4 million; most of this is related to the AFMC tax credit. Steve will provide more information on income tax receivables during his comments.
In March, Standard & Poor's recognized our continual improvement in leverage and operating performance by raising our rating to BB with a positive outlook. We are encouraged with the work we have done to reduce cost and improve margins.
The positive EBITDA and earnings growth were also helped by significant improvements in marketing conditions this year compared to this time last year. We still have a ways to go.
As a key milestone we are pushing hard to drive our return on investment above our 11% cost of capital. Now, Steve will review the supplemental reconciliation charge that were provided with the webcast and on the company's websites.
Steve.
Steven Dean
Good morning. First of all, I'd like to say that it's always nice to be able to talk about a good quarter like the one we just completed.
I was particularly pleased that our cash flow generation was so strong during the quarter that it allowed us to meet our debt reduction goal one quarter early. I'd like to provide you with some color behind the quarter's financial results and focus on just a few of the supplement charge, comparing our results with the just completed January through March quarter, our fiscal third quarter, to the October-December quarter, which was our fiscal second quarter.
We've also included several slides with comparisons against the year-ago quarter in the appendix for your reference. Starting with slide number four, you'll see a consolidated earnings summary comparing our earnings for the just completed third quarter to the second quarter.
First, let me walk you through the special items that impacted our reported third quarter earnings mostly on the positive side. Net income for the third quarter of $19.3 million or $0.49 per share as you see at the bottom of the slide included a couple of benefits that we weren't counting on going into the quarter.
First of all, although as John mentioned the alternative fuel mixture credit expired at the end of December, we were able to recognize an additional $4.8 million in AFMC income in the third quarter. This was because the clarification of the rules by the IRS in February allowed us to reverse reserves relating to the inorganic content of the black liquor.
This added $0.11 per share to earnings for the quarter. In addition, income tax expense for the quarter was reduced by $7.4 million or $0.19 per share for energy investment tax credits associated with the Foley Energy Independence Project, of which $6.6 million or $0.17 per share was related to prior period expenditures.
We expect to continue to receive investment tax credits over the next several years based on planned spending on energy projects at our Foley mill, and this will have the effect of reducing our effective tax rate going forward. I'm sure you noticed on the balance sheet that the income tax and AFMC receivable has increased to $74 million from $65 million at the end of December.
This increase was driven by both the reversal of the AFMC reserves and the investment tax credits. We expect to receive $11 million of this amount as an income tax refund for our fiscal year 2009 sometime this month, leaving about $7 million to offset taxes on our expected fourth quarter earnings, and $56 million to be received as an income tax refund for fiscal year 2010 sometime in the latter half of calendar 2010.
The other two special items which affected earnings during the quarter were restructuring expenses of $2.4 million relating to reductions in SOA headcount announced during the quarter, and early debt extinguishment cost of $1.5 million associated with the $35 million in bond redemptions completed in early January. These two items came in very close to the estimates we communicated during last quarter's earnings call, and collectively reduced our earnings for the quarter by $0.07 per share.
Excluding the impact of the alternative fuel mixture credit, investment tax credits relating to prior periods, restructuring, and early debt extinguishment cost, the effective tax rate for the third quarter was 35.3% compared to 36.4% in the second quarter, and 24.8% in the third quarter of last year. After adjusting for the special items I just discussed, adjusted earnings per share for the quarter were $0.28 per share, which was up $0.06 over the preceding quarter.
What drove this improvement? Net sales were up $7.4 million or 4% compared to the second quarter.
Shipment volume was up about 1% for specialty fibers and was flat for nonwoven. The sales increase was primarily driven by higher pricing in our Specialty Fibers market.
Moving down the chart, you can see that adjusted operating income, excluding the impact of alternative fuel mixture credits and restructuring expenses on our results, was up by $2.7 million compared to the second quarter. Operating income for our Specialty Fiber segment improved by $4.1 million, primarily due to increased selling prices that more than offset higher energy and transportation cost during the quarter.
Operating margins for Specialty Fibers improved from 12.5% in the second quarter to 14.8% in the third quarter. Operating income for nonwovens was down $1.2 million versus the preceding quarter.
The rising fluff pulp prices that are helping our specialty fibers business are having a smaller but negative impact on operating margins on our Nonwovens segment, which dropped from 7.6% to 5.7%. Cold weather early in the quarter also resulted in higher energy cost, experienced in both our Specialty Fibers and Nonwoven Segments.
Finally interest expense for the quarter was down $0.7 million compared to the previous quarter, due to debt reduction and a lower average interest rate. On slide number 5, we have a waterfall chart that explains at a summary level the $0.06 improvement in adjusted earnings per share between the second and third quarters.
You can see that in summary, we had a small $0.01 per share (help) from increased shipment and production volumes, and that higher selling prices added $0.10 to earnings for the quarter, which was more than enough to offset an $0.08 increase in cost due to increased costs for energy, transportation, and fluff pulp used in our Nonwoven segment. Interest added $0.01 to earnings and we picked up an additional $0.02 from a combination of mitigation bank credit sales in Florida, and a slightly lower tax rate.
Skipping ahead in the presentation to slide number 7, I wanted to briefly comment on our debt and maturities. We used most of the $18.2 million in free cash flow generated during the quarter to reduce our total debt from $290 million at the end of December, to $273 million at the end of March.
We redeemed $35 million of our 2013, 8.5% bonds on January 4, of which $17 million went to debt reduction and $18 million was financed using our bank revolver at an interest rate of about 1.5%. We redeemed another $25 million of these 2013 bonds on April 19.
By the end of the fourth quarter, we expect to have $140 in outstanding 2013 notes, and a $110 million OS borrowed on the revolver, which will leave our borrowing availability on the revolver at $85 million, close to where it was at the end of the third quarter. Now, I'll turn it back over to John.
John Crowe
Thank you, Steve. As Steve shared, we continue to experience improvements in our markets, and we will continue to seek opportunities to improve our product mix.
Our outlook is favorable. Wood, Incontinence, Specialty, and Fluff markets are tight, and our Nonwovens material markets continue to show steady growth.
We expect to benefit from higher prices in the fourth quarter. This will be partially offset by rising input cost.
We will pass input cost escalation through with pricing adjustments in most of our businesses. On April 19th, we completed the redemption of $25 million of our 8.5% 2013 Senior Notes with borrowings on our bank facility.
This will further reduce interest costs going forward. We will incur a $1.2 million charge related to the retirement of these bonds, or a 2% per share adjustment in the fourth quarter.
While our cotton business is profitable with a strong demand for our products, the costs and availability of linters, which is the raw material for our cotton facilities, is a limiting factor for our cotton specialty products. While results were improved in the quarter, we are focused on making more improvements.
The organization will continue to focus on reducing cost and controlling working capital. Also, we need to drive our return on investment above our cost of capital by growing profitably, improving our operational efficiency, and effectively allocating our capital spending.
Near term operational reliability and procuring linters are some of the keys to building on the current quarter success. If we can make the product, we can sell it.
And in many cases, our customers are on allocation. We have several maintenance outages planned at our Florida mill on different pieces of equipment during June that must be managed well to avoid loss productivity and increased cost.
We expect production in our Florida mill and shipment volumes be down approximately 7,000 tons in the fourth quarter, compared to the just completed quarter. Buckeye is now positioned to have a more balanced approach for allocation of capital, to continue to reduce debt, while investing in profitable growth opportunities and other ways to create shareholder value.
Our strategic growth team has increased to focus on reviewing growth initiatives, and discussing those options with our Board of Directors. Our Florida mill Energy Independent Project is on track for startup beginning the fall of 2011.
By the end of this fiscal year, June 30th, we will have spent approximately two-thirds of the $45 million allocated for this project. Again, the expected savings is in the $15 million per year range, with a potential upside, depending on oil and electrical cost in the future.
In June, we will have a 22-day outage on our number 2 recovery boiler at our Florida facility for annual maintenance and inspection, and we will use this opportunity to make tie-ins for the necessary changes to support the energy project. As I stated a minute ago, the challenges will be to manage this well and minimize any disruption to overall plant productivity.
On March 1, a ceremonial groundbreaking was held for our biorefinery pilot plant and our partnership in this research with the University of Florida. The pilot plant is scheduled for start-up in mid-2011.
We believe this will lead to new product revenue streams which could include biochemicals. Our Florida mill should be a desirable partner for a chemical or energy company.
In closing, we anticipate that we will continue the EBITDA and earnings growth in our next several quarters. We must run reliably, as our inventories are minimal.
We will continue to focus on optimizing our operations and increasing shareholder value. With fourth quarter pricing improvements partially offset by increasing input cost and the challenge of the maintenance activities at our Florida site, we should see a modest upside in earnings compared to the just completed quarter.
I would like to inform you that due to the timing of restricted shares award, that's seen at the end of April and associated with holding tax obligation, most recipients of these restricted shares will have shares withheld to satisfy these tax obligations. In the case of insiders, this will result in the reporting of a (deposition) transit action with the SEC.
I don't want this activity to surprise investors. This completes our prepared remarks, and we are now ready to answer your questions.
So let me turn the call back over to (Darin).
Operator
(Operator Instructions) And our first question comes from UBS's Gail Glazerman.
Gail Glazerman
John, can you talk a little bit more about the cotton business, what your operating (roots) were in the quarter, and any call on what you might be able to do to drive those further, given progressive strong demand?
John Crowe
We've got Doug Dowdell, our Senior VP in charge of Specialty. And we'll let Doug speak to that.
Doug Dowdell
Demand for our high end markets in our cotton business has rebounded, and demand frankly is quite strong. On the balance side right now, our production is constrained by having enough affordable raw materials at both of our facility.
So we're at or near the last reported, around 50% capacity utilization. But what I would really want to emphasize that as long as the viscose staple market remains strong, cotton linter availability and cost will be challenging.
And what we're really focused on, we're working with our customers for long-term commitments, allowing us to go out and buy raw materials with more certainty of being able to recoup these costs while also giving our customers' certainty of supply. So we have a plan in place to meet our customer needs, and we're supplying those; it really value our very unique, high-end capabilities.
Gail Glazerman
And (inaudible) 7:00:45 the quarter?
Doug Dowdell
Near 50%.
Gail Glazerman
Still near 50%. And with the 5% (closing), you saw enough to offset the costs, or are you lagging in that?
Kristopher Matula
We have very strong demand for our high-end products right now, and so we are able to pass through those costs in the higher prices.
Gail Glazerman
Just switching gears a little bit, there was talk in the quarter, if someone buying a commodity pulp mill and converting it to some from of dissolving. I don't know if you have any perspective on kind of if that would impact any of your end markets, given that's for the year.
Any comments on that?
John Crowe
We're aware of those conversions, and certainly they're targeted at the strong viscose market that Doug referenced. There's really no direct impact other than it's an increased indication the viscose market is strong, and we can compete in that market.
Doug and Chris said just a minute ago, all of our traditional markets are strong. So I don't see any real direct implication to Buckeye.
Gail Glazerman
On the Fluff Pulp business, you had about $36 improvement quarter-on-quarter, and then you had some lag. Can you just talk through kind of how much of (announced) price increases you've seen relative to how much, at least through the April price increases that are out there, and never mind the new May 1, what we should expect I guess in the current quarter?
Doug Dowdell
Frankly, the demand for our absorbent products is exceptionally tight, and frankly, customer demand is outstripping our ability to supply. And we are below our targeted inventory at this time.
So we're going to be relying heavily on the plant's ability to run efficiently and reliably to meet our customer needs. And as you mentioned, last quarter, the average index pricing I would call it was up about $72.
And frankly, you've seen the announcements that are out there. We would expect that trend to continue, and as benchmark pricing moves up, our prices move up, and we certainly would expect them to be higher this quarter than they were last quarter.
Gail Glazerman
So that means, even just from what happened in the third quarter, what happened in the quarter that just ended you should have at least another $36 million coming, never mind that April and possibly May prices are up?
John Crowe
$36 million would be nice.
Gail Glazerman
$36 a ton.
John Crowe
Doug mentioned that benchmarking the indexes, we lag a little bit, but we would expect that trend to continue.
Gail Glazerman
In closing, Kris, can you give us any update on, given the cost moves what your specialty prices should do in the quarter?
Kristopher Matula
Yes, I can do that. With our cost pass-through mechanism, we expect our specialty pricing to be up about 2%.
Gail Glazerman
And just turning more strategically, with the new debt target, is that kind of about would take you to a level that you think is comfortable and sustainable? Would you imagine wanting to get that down further beyond that?
Steven Dean
What we've said is, we're targeting a leverage ratio between 2 and 2.5. So getting below 250 gets us in that range, the 200 to 250 range.
And frankly, if you look at the big receivable we have and the tax refund we're going to get at the end of 2010, that's going to get us down around 200, which I think is really where we want to be.
Gail Glazerman
And John, just a little more color I guess on potential investment, uses of cash. Last quarter I think we touched on the potential of the dividend.
Can you give any sort of update, given your performance in the quarter, the fact that your receivable is larger now, on when you might be comfortable and when the Board might be comfortable making a move on some of these?
John Crowe
Well, as I said in my prepared remarks, we're now in a much better position to be balanced with continuing to pay down. And it sounds like Steve just said, it's a new bid target going forward.
And so, we are much better positioned to do a combination of things with balanced approach. We do have several projects.
It's too early to announce what they would be, but they are internal projects that allow us more capability at our facilities to take out cost, but also compete more competitively in certain markets. So those are going to have good rate of returns.
And then it's too early to talk about some of the options that the strategic growth team is looking at. We are working with the Board of Directors, so we do have several options in the plan.
We are evaluating return on invested capital for each of these, and some of them are going to compete with each other, but it's a little early for me to be announcing what exactly we're going to do. It's just much better positioned for Buckeye than we've been in years past, and we feel good about some of the things that are available to Buckeye going forward.
Gail Glazerman
And can you just talk about how something of a dividend may fit in within that? I mean, if these projects have better than 11% profit after returns, I mean the dividend would probably be kind of pushed down in terms of priority.
Is that something that the Board is pretty keen on doing?
John Crowe
We think we can be balanced in that if we were to pay a dividend, it'd be a modest, small dividend that we can do that and it'd not really impact the other things that we want to do. The projects that have high rate of returns are still available for us to do, and we can build the dividend into that.
I think that's the strategy, if we make that decision.
Steve Dean
Because what we'd be doing, Gail, is really redirecting some of the cash flow that was previously going to debt paydown and interest to this modest dividend that John referred to. So I think we can do both.
Operator
Moving on to Chip Dillon with Credit Suisse.
Chip Dillon
Wanted to verify that, I think if I recall correctly you make about 50 or 55,000 tons a quarter of fluff pulp that you sell into the market. Is that correct?
John Crowe
Yes.
Chip Dillon
And when you look at the fact that you're going to take more downtime in the fourth fiscal quarter, I would also expect that you probably, and I think you alluded to this, you were impacted by the weather issues in the third fiscal quarter. Do you think that those impacts in the fourth quarter will be bigger from the maintenance downtime at Foley than what you experienced from the weather in the third?
Steven Dean
Well, let me clarify, Chip. We really don't plan any downtime on the pulp stream.
What we do have is a recovery boiler outage. Maybe you don't know this, but we have three recovery boilers at our Foley facility.
And when you take one of them offline, it just reduces your flexibility. So if you have any problems or issues, then you have a potential to lose tons.
And given our inventory, we lose a ton it's just not there to ship. You heard talk about how tight the market is, so we know we're going to have about 7,000 tons less to ship in the quarter than we had last quarter because inventory is low.
We actually did even pull down inventory last quarter, and it was already low. So you can imagine how low it is.
So it's just something that has to be managed. It's normal maintenance.
We have seven boilers at Foley, so we have a chance seven out of 12 months to have one boiler down. It's just when you take a large recovery boiler down, you lose some of your flexibility.
We expect Doug and his team to run well and produce the tons. We just know it's a little more challenging when you have got one of your recovery boilers that's going to be down for 22 days.
And it's absolutely necessary to take it down at this time to stay on track with our energy project and the benefits we get from that project being completed.
Chip Dillon
But it would sound to me that something really wrong would have to happen, assuming we get these fluff increases at least in May for you not to at least replicate what you did in third fiscal quarter on the bottom line?
John Crowe
That's the plan. I did say, we expect a modest improvement over the last quarter even with the 7000 less tons.
Both Kris and Doug mentioned pricing increases, so we expect the pricing increase to offset the loss. I think the 7,000 tons, if we had it, we'd have, what Doug, another --
Doug Dowdell
$2 million if we could replace all of that production. And I certainly have confidence in the leadership at Foley and their attention to the outages, and focus on reliability.
And I'm certainly expecting them to prove a bonus number.
Chip Dillon
The CapEx of the first nine months was about $30 million, and our model says $50, so I guess that's what we've talked about in the past. And I know that the fourth quarter should be a big quarter with the extra spending at Foley.
Is 50 a good number to use for the year, or would you move that around a little bit?
Kristopher Matula
Historically, we do spend more capital in the fourth quarter; we also do have a fair bit of the energy spending in the fourth quarter. So, I think you should expect to see a number approaching 50 ballparkish number.
Chip Dillon
And then as we look out, next year it looks like the bulk of the Foley spending, I think you said would be done by the end of this fiscal year. So there is a bit left next year.
I guess what I'm asking is, if you first don't assume and then you do assume you tackle some of these projects that you're looking at, what sort of range could we expect for next year? Could it trend all the way up to $100 million, or sort of what should we think about?
John Crowe
$100 million would be way too high for next year. I think you'd see a repeat this year.
We still have about a third of the spending on the energy project, we're going benefit from some tax credits, hopefully going forward. So $60 million would be large number.
Chip Dillon
And that would actually take into account some of these projects you're talking about?
John Crowe
Sure, because as the spending on the energy project drops off, as we've said in the past it takes about $30 million for basic maintenance of our facilities, and so if you had $50 million, you got $20 million for improvement, if you have $60 million, you got $30 million. So with the drop off in spending on the energy project next year, we should be in good shape to do the projects we need to do.
Chip Dillon
Well, your net debt is down to 173 when you count this refund. And if you spend only 60, and we're half rate on pulp next year, it looks like you'll see that net debt figure come down even further.
It's like approaching $4 a share. I know you've mentioned that you're looking at a dividend.
I guess as you think more broadly, if the market stays relatively healthy across your segments, is there the prospect of acquisitions or other broader uses?
Steven Dean
Well, the strategic growth team is including all the options that are available to us. As I said, we are much better positioned now to consider those options.
So those are there, certainly we want to be cautious. We've been down that road before and we want to make sure that we make good decisions that are overlapping with our capability and our assets.
Chip Dillon
And then lastly, one option of course, it depends on where is the stock. And do you have a current authorization in place?
John Crowe
To stop repurchase?
Chip Dillon
Yes.
John Crowe
We do. We still have about, Steve?
Steven Dean
I think it's around 5 million shares.
Operator
(Operator Instructions) Next we'll move on to Bill Hoffman with RBC Capital Markets.
Bill Hoffman
John, I wonder if you could just talk a little but about these cotton markets and the fact that we're still running about 50% of capacity. Do you see anything out there that is going to free up some availability on that side, or how are you thinking about the business right now?
John Crowe
Well, the near term, you heard Doug's comment. One of the things we want to do is work with our long-term customers.
And to me that is really key, because what that would allow you to do is to know you have the sale that allows you to be more flexible on what you might have to pay for the cotton. The viscose market is good to Buckeye when it's strong, because when we participate in it, and would, it's a nice market, but it does present some problems for cotton.
And we just got to find a way to mitigate that. And I believe the supply of customer line that Doug mentioned is key to us getting our capability up, so we're running beyond 50%.
We are profitable at 50%, but obviously we're missing an opportunity with that capacity not producing product.
Doug Dowdell
I would just say, we continue to look at ways to increase our lint supply long-term, and we're not in a position certainly to announce anything there yet. But that's certainly a focus.
I think it's also important to know, we have taken out considerable cost out of the Memphis plant. So we've proven, even at a much lower capacity utilization that the Memphis plant can be profitable.
With that said, if we can't secure more lint then we could substantially improve our results in Memphis.
Bill Hoffman
Do you have any thoughts at this point in time of like what the achievable target is from a capacity utilization standpoint? I mean, can you move it from 50% back to 75%?
Kristopher Matula
I think the progress as we make it will be steady progress. I don't think there's kind of a magic switch to jump that up significantly in a short period of time.
So we're working those issues, and we position the business to be very successful even operating at the current rate it is right now. And we've got a lot of individuals working on improving the availability of raw material as well as working with our customers to ensure that we have the right long-term commitments that enable us to go out and get the raw material and then ensure that they have long-term supply.
So I think all of those working together will continue to improve the business.
Bill Hoffman
Just with regards to the nonwoven's business, can you just talk a little bit about what you see in the outlook there from a growth standpoint?
Kristopher Matula
If you look at our nonwoven's business, if you look at our overall demand trends, they continue to be positive. So we continue to have low-to-mid single digit growth in terms of volume.
Obviously, as we mentioned, with fairly dramatic run up in Fluff Pulp prices which obviously is an overall net positive for Buckeye, if you look at the ability to pass-through those cost increases, you do tend to lag a little bit and so our margins are compressed. And so, we would expect with the continued run up in Fluff Pulp that have been announced that we'll continue to be under pressure.
But we're working very hard to get our prices up with our customers, and we expect we'll be able to do that. So we've continued to see positive growth going forward.
I think as you're aware, there is new capacity that's been started up over in Europe. While we really still haven't seen a lot of direct impacts of that, I think you'll see a more challenged market in Europe over the next 12 months or so timeframe with that capacity, particularly with kind of the high cost environment.
So I think that'll be a little bit more challenging environment as we go forward.
Operator
And gentlemen, we have no further questions at this time. Mr.
Crowe, I'll turn the conference back over to you for additional or closing remarks.
John Crowe
I want to thank everybody for taking time to listen to our earnings call. We feel like we've made significant progress and we're focused on profitable, sustainable growth and adding shareholder value.
And we hope you have a good day. Thank you.
Operator
And everyone that does conclude today's third quarter earnings results conference call. Thank you for your participation.