TG - NYSE

Neill Bellamy - Nancy M. Taylor - Chief Executive Officer, President and Director Kevin A. O'Leary - Chief Financial Officer, Vice President and Treasurer

F. Drake Johnstone - Davenport & Company, LLC, Research Division Justin Bergner - G. Research, Inc.

Greetings, and welcome to the Tredegar Corporation 2014 Midyear Financial Results Review. [Operator Instructions] It is now my pleasure to introduce Neill Bellamy with Tredegar Corporation. Thank you. You may begin.

Thank you, Danielle, and welcome to the Tredegar Midyear 2014 Financial Results Review. Our earnings for the second quarter and first 6 months of 2014 were released after the close of the market yesterday, and you'll find our press release, as well as supplemental materials, including non-GAAP reconciliations, 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 law. Please note the cautionary language about our forward-looking statements that is contained in our press release. That same language applies to this call. Please note that our comments today regarding financial results exclude all nonoperating or special items, and reconciliations related to any non-GAAP financial measures discussed today may be found in the slides accompanying this presentation and our supplemental materials on our website. With that, I'll turn it over to Nancy Taylor.

Good morning. I'm Nancy Taylor, Tredegar's Chief Executive Officer. With me today is Kevin O'Leary, Tredegar's Chief Financial Officer. Thank you for joining us today. Our efforts to increase our shareholder communications has -- have been very well received, so in response to that feedback, we've added this midyear review of our financial results. Today, we will discuss second quarter results and give you an update on our expectations for our 2014 performance target that we last communicated at the May shareholders meeting. In our previous discussions this year, we've described 2014 as a building year. As part of our strategy, we have undertaken a number of capacity and capability expansion projects for each of our businesses, with many of these expansion projects coming online in 2014 and continuing to ramp up during 2015. These investments lay the foundation for future organic growth. We know that as we pursue growth in new and emerging markets, there will be ups and downs before the growth opportunities fully evolve. As we will discuss further in a few minutes, we are managing through some downs and remain confident that we are building a stronger Tredegar. During today's call, I will hit the year-to-date highlights. Kevin will take you through our second quarter review, and then I will update you on our outlook relative to our 2014 performance targets. Bonnell has been having a great year. For the first 6 months, Bonnell's volume is up 4% and operating profit from ongoing operations is up over 43% in comparison to last year. Along with incremental volume resulting from the ramp-up of the new automotive press, we captured volume growth from our other non-construction end markets, while experiencing limited growth in nonresidential building and construction. In the second quarter, it was low single-digit growth in nonresidential building and construction, which was an improvement over 0 growth in this segment for the first quarter. As for our meaningful profit improvement, in addition to higher volume and a favorable product mix, the team at Bonnell has been adept at managing cost and driving production efficiency. Ramp-up of the new automotive press is proceeding well. We are quite satisfied with the performance of the press. Additionally, we have customer commitments for over half of the press's capacity, and we are pleased with how new opportunities are tracking against our ramp-up plan. Now let's talk about Films. For the first 6 months, volume is down 10% and operating profit from our ongoing operations is down 11% in comparison to last year. While we've made some good progress on many of our initiatives for new products and to grow with key customers, we have incurred some of the downs that I referred to earlier. Inventory collections have impacted our surface protection film volumes. In addition, we have incurred some minor market share loss for our lower tier surface protection films due to competitive pricing. Inventory collections are not unusual in the display market. Unfortunately, it can be difficult to predict when they may occur. We continue to have strong customer relationships with key players in the industry, and our growth -- our surface protection films are well positioned for continued growth. We continue to battle market and operational challenges for our flexible packaging films in Brazil. As we previously described, the market challenge is a down cycle for this industry that has been deeper than we anticipated. This has not affected our longer-term view that this market offers attractive growth prospects. We still have not resolved the operational issues in our Cabo, Brazil facility, and we are not happy about that. The issues will be resolved by the end of the year. Earlier this year, we put in place new leadership with a strong track record in manufacturing in Brazil, who, after being immersed in the operations for the last few months, have rendered a comprehensive assessment of the issues. We have brought in outside experts to work hand-in-hand with our local leadership to execute upon a detailed action plan to attack the issues and deliver sustained improvements. There is laser focus on this. And I want to repeat, the issues will be resolved by the end of the year. A real bright spot for Films has been our new product launches that are gaining traction in the personal care and surface protection markets. As an example, we are seeing very strong customer interest on our new surface protection product, PEARL. This product is gaining a lot of attention in the market due to its superior quality and suitability for use in highly demanding display applications. PEARL is rapidly becoming a meaningful contributor for Films. We talked about the importance of our emerging market strategy for personal care and are pleased with customer response to our new elastic products developed for baby diaper applications in the Latin America -- in Latin America and Asia. And we've had some initial success with our elastic for baby diapers in Africa. We're also seeing strong support in North America for our new elastic products that we have developed for baby diaper and adult incontinence applications. Now I'll turn it over to Kevin for more detail on the financial results in the -- on the second quarter.

Thank you, Nancy. Now turning to results for Tredegar Corporation for the second quarter of 2014. Diluted earnings per share for -- from continuing operations were $0.11 per share. This includes a pretax charge of $10 million associated with a one-time lump sum license payment to 3M. That's settled all pending litigation with 3M for certain elastic Film Products. We're pleased to have this matter behind us. Details of all special items, which include the impact of nonoperating investments, asset impairments and restructuring charges are available on our website, along with additional information on discontinued operations in the prior year. Excluding special items, net income from ongoing operations of $11.1 million was up 14% from prior year. The earnings per share from ongoing operations of $0.34 was $0.04 favorable to 2013. There are a few key items I'd like to highlight for the quarter. The combined operating profit from the ongoing operations of our business segments, Film Products and Bonnell, was $23 million, which was consistent with prior year. I'll cover results for our -- I'll cover results by business segment in a moment. Corporate expenses were $2.1 million lower in the second quarter compared to prior year, driven primarily by lower noncash pension expenses of $1.6 million. As I've mentioned in the past, lower pension expense is a result of an increase in our discount rate at December 2013 and our decision to fully freeze our defined benefit plan. The effective tax rate on income from ongoing operations was 35% compared to 34% in the second quarter of 2013. For the full year, we expect the effective tax rate on income from ongoing operations to remain in the 35% range, consistent with our projection from the May shareholder meeting. The higher rate for the full year of 2014 compared to the effective tax rate of 31% in 2013 is driven by geographical income mix and the timing of recognition of the U.S. R&D tax credit. Turning to our business segments. Let's begin with Film Products. I'd like to bring your attention to adjusted EBITDA. At $23.2 million, EBITDA was down $5 million for the quarter compared to the prior year, with EBITDA margin of 15.9%, essentially on our total year target of 16%. Some key performance drivers for the quarter. As we've discussed, the ramp down of certain North American baby care elastic laminate volume occurred in the quarter, and this had a $2.2 million impact on profit for the second quarter. The sales of this product were substantially complete as of the end of the second quarter. In surface protection, the inventory correction with a key customer continued into the second quarter. And while we had strong operational performance in surface protection and personal care materials, as Nancy mentioned, market and operational challenges continue to impact performance at our flexible packaging operation in Brazil. Looking ahead, the surface protection inventory correction will continue into the second half of 2014 as the adjustment is balanced across the year, and the ramp-up of the new flexible packaging line in Brazil is now expected to begin in the fourth quarter of 2014. Turning to Bonnell. As Nancy mentioned, we had a very strong quarter in this business, and that follows a strong first quarter. Adjusted EBITDA at $10.7 million was over 60% higher than the second quarter of 2013, with EBITDA margin of 12.7%, up over 400 basis points from prior year. Positive results in Bonnell were really across-the-board with improved manufacturing efficiencies, higher sales volume and favorable product mix with strength in [indiscernible], painted and fabricated finished products. Although our core market, nonresidential building and construction, had modest growth of about 2% for the quarter, our volume in this market grew at about 4%, driven by success in initiatives to improve share in this market. Automotive volumes increased with the incremental business from the new press and volumes in other key markets, such as consumer durables and machinery and equipment, were up for the quarter. Bonnell's automotive press continues to exceed expectations in productivity and quality, and we look forward to ramping up volume during the second half of the year. Looking ahead, there is some pressure on industry growth projections in the nonresidential building and construction market, our largest market. Through June of this year, our volume, driven by industry growth, has fallen short of industry projections of 4% growth for 2014. We're just not seeing that yet. Now let's take a quick look at other financial highlights as of June 30. Cash from operations of $16.8 million is net of the $10 million litigation settlement payment to 3M. Our balance sheet remains strong with total debt to adjusted EBITDA of roughly 1.4x. Our return on invested capital at June 30 is 8.4%. Our expectation of 2014 performance remains in the 8% to 9% range. You can see capital spending is $23 million year-to-date, our outlook for the year is $54 million, down $6 million from our projection at the May shareholder meeting. And as Nancy mentioned, this year, we will complete most of the capacity expansion projects underway at Film Products that are critical to our growth strategy in emerging markets. And the new press at Bonnell supporting the automotive industry is ramping up. Turning to dividends. Our dividend payments of $5.2 million through June reflect our recent dividend increase of $0.02 per share. This was our fourth increase to our quarterly dividend in the last 4 years. Over that time, we have more than doubled our quarterly dividend from $0.04 to $0.09 per share. In closing, I want to emphasize that we continue to build our capabilities as we address near-term challenges. Our liquidity and cash performance have allowed us to invest in growth and increase our dividends along the way. With that, I'll turn it back to Nancy.

Thanks, Kevin. Now that we've given you an update on how that year is proceeding, we'd like to turn to our performance targets for 2014 and beyond. The 2014 volume target for Films was modest due to the expected loss of certain North American baby diaper elastic laminate volume. As we previously outlined, Film's 2014 volume target was linked to the timely ramp-up of the new flexible packaging capacity in Brazil, and to a much lesser extent, incremental volume growth for our surface protection films. We expected a second quarter startup for our new flexible packaging line. The ramp-up of this line is now expected for the fourth quarter of this year, as Kevin pointed out. While we are disappointed in the project delay, I'd like to provide some context. This is an $80 million project. By far, the largest in Tredegar's history, and spanned 2 years. In terms of sheer size, we expanded the building footprint by almost 30% to accommodate a line which is longer than a football field, and this new PET line will almost double the capacity of the Cabo, Brazil facility. The delay in this project has created a sizable volume mix for Film's 2014 target, contributing to a lesser degree, our lower volumes for surface protection. Both of these dynamics will impact third quarter volumes as the inventory collection in surface protection is expected to be spread over the entire year. Third quarter volume will be impacted further as we experience the elimination of all but de minimis volumes for certain North American baby care elastic laminate films. A mouthful. Due to the volume shortfalls, we are lowering Film's 2014 volume target from 2% growth to a year-over-year volume decline of 7% to 10%. Despite missing the short-term opportunity from getting the flexible packaging line up early in 2014, we are still confident that we will benefit from this incremental volume over the long term. This capacity is crucial to maintaining our industry leadership position in a key emerging market. We expect Film's EBITDA margins to be in line with a target of 16%. Operating efficiencies in personal care and surface protection, along with mix enhancement in surface protection and effective cost management should offset the impact of lower volumes and allow us to meet our target. For Bonnell, our 2014 volume of 9% took into account the industry expectation of 4% growth in nonresidential building and construction for the year. This is still our largest market, and we have not seen nearly that type of recovery this year. Kevin said 0 growth in the first quarter and 2% growth in the second quarter. In addition, while we're encouraged by the interest in our new automotive press, a program delay for a key automotive customer has shifted the startup for that automotive program in the third to the fourth quarter of 2014. So we are lowering our 2014 volume target for Bonnell and expect volume to be in the range of 6% to 8% higher than 2013. Thanks to Bonnell's strong operating margin performance this year, we consider our 9% EBITDA margin target to be solid. As for Tredegar's return on invested capital performance, we are holding to our 2014 target range of 8% to 9%. Most of the significant capacity expansion projects that we have undertaken in the last 2 years are winding down, and the production on that new capacity will be ramping up during the fourth quarter and into 2015. Looking forward to 2016, we continue to expect to achieve a compounded annual volume 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 of around 11% and would expect to continue to improve on these financial metrics beyond 2016. While disappointing, we are facing our short-term challenges head-on and remain confident in, and committed to, our longer-term growth strategy. We are putting the capabilities and capacity in place to deliver on that strategy. Our cash flow remains strong and our track record on dividend increases demonstrates our commitment to return capital to shareholders. We are building a stronger Tredegar. And with that, we'll open it up for questions. Operator, may I have the first question?

Yes, we have specific customer commitments there, and one of the programs has been delayed by the customer. And so as I said, instead of that volume starting to ramp up in the third quarter, that now has been pushed into the fourth quarter.

I think the important thing is that, again, when you look at it, there's actually been a favorable mix there. And so, again, with the higher value PEARL product, we've been really happy with that rollout. So you...

On balance?

Well, a couple of things. As I mentioned, we are looking at our overhead and we're watching that closely, and we're containing costs. We also, with the settlement of 3M, we won't have litigation costs in that because we've made that settlement. So there are a couple of things in GS&A that are important. There's also, as Nancy mentioned, favorable mix in a couple of areas. So with favorable mix, some real cost containment and the things that we can control and that affect our long-term plan, we're doing that.

No, we're holding. We feel good about those targets still.

Biggest thing we're seeing is some timing with 2014. It doesn't affect our view of '16.

[Operator Instructions]

All right. Well, thank you so much for listening in today, and we appreciate the questions. Thank you.