Q1 2004 Applied Extrusion Technologies Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Welcome to the Applied Extrusion Technologies conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Brian Crescenzo. Sir, the floor is yours.

BRIAN CRESCENZO, VP FINANCE, TREASURER, APPLIED EXTRUSION TECHNOLOGIES: I am Brian Crescenzo, Vice President of Finance and Treasurer at AET. Thank you for joining us today. The purpose of this call is to discuss our fiscal 2004 first quarter financial results as announced in a press release issued on Tuesday evening. AET's financial news releases will generally discuss results on a Generally Accepted Accounting basis, or GAAP basis, only. The Company will disclose unusual or onetime items when necessary to help provide a more meaningful picture of underlying trends, and will continue to disclose EBITDA, earnings before interest, taxes, depreciation and amortization, and EBITDA as adjusted for unusual or onetime items as determined under AET's bank credit agreement, adjusted EBITDA. EBITDA and adjusted EBITDA are non-GAAP financial measures as defined by the Securities and Exchange Commission. This news release represents EBITDA as an additional measure of operating performance and our ability to service our debt. We also present these measures because investors have expressed an interest in such information. EBITDA and adjusted EBITDA should not be viewed as substitutes for or superior to net earnings, cash flow from operations, or other data prepared in accordance with GAAP, as measures of our profitability or liquidity. Since EBITDA and adjusted EBITDA are not prepared in accordance with GAAP, they are not necessarily comparable to similarly titled measures furnished by other companies. As required by the SEC, we provide a table at the end of this release reconciling EBITDA to net income.

By now you should have received a copy of the press relates; if you haven't received it, please call Kim (indiscernible) in investor relations at 302-326-5648, and she will send it to you.

We will begin with remarks from Amin Khoury, Chairman and CEO of AET, and then we will take your questions. AET's President and Chief Operating Officer, David Terhune, and I, will be joining Amin for the question and answer session. In making our prepared marks today and during our responses to questions, we rely on the safe harbor exemptions under the various security acts and our safe harbor statements in the Company's filings with the SEC. And now let me introduce Amin Khoury.

AMIN KHOURY, CHAIRMAN, CEO, APPLIED EXTRUSION TECHNOLOGIES: Thank you, Brian, and good morning everyone. Before I get before I get into the details of the financial results, I would like to make some general comments about the quarter just ended.

On the positive side, we are encouraged by the success of our sales initiatives, which are expected to result in significant volume growth and inventory reduction over the next three quarters. In addition, we continue to realize the benefit of our restructuring and cost reduction programs. That said, industry demand remains sluggish and raw material costs continue to escalate.

Now let's get started with the first quarter financial results. Sales for the first quarter of fiscal 2004 of $57.6 million were $1.8 million, or 3 percent lower, compared with the first quarter of fiscal 2003. A 5 percent decline in unit volume was partially offset by a 2 percent increase in average selling price. The average selling price reflects a unit price increase of approximately 5 percent, partially offset by a less favorable sales mix. That was as a result of lower label sales in the first quarter of fiscal 2004, a situation which we expect will be rectified during the next three quarters.

Gross profit for the first quarter of $9.6 million was 2.6 million, or 22 percent, lower then the first quarter of fiscal 2003. The $2.6 million reduction in gross profit was due to an approximate increase of $3 million in raw material costs, a $1 million increase in depreciation expense, and slightly lower volume. These cost increases were partially offset by $2 million of improved price realization and manufacturing efficiencies realized during the current period. Gross margin was 16.6 percent versus 20.5 percent in fiscal 2003, reflecting the net $2.2 million increase in manufacturing costs which we just discussed.

Operating expenses of $7.1 million were $1 million, or 13 percent, lower as compared with the same period of the prior year. Approximately half of these savings reflect the benefit of our cost reduction programs, and the remaining half reflects non-recurring restructuring or transition expenses which were incurred in the first quarter of fiscal 2003 and are no longer being incurred. Operating profit of $2.4 million for the first quarter was $1.6 million lower than operating profit in the same period of the prior year.

Interest expense was $10.6 million in the quarter; that was $3.3 million higher than the first quarter of fiscal 2003. This increase, however, reflects approximately $2.2 million of non-recurring expenses associated with the Company's refinancing on October 3, 2003. The remaining increase of $1.1 million is due to a higher average debt balance and lower capitalized interest.

The net loss for the first for the first quarter of fiscal 2004 was $8.2 million, or 64 cents per share, compared with a net loss of $3.3 million, or 26 cents per share, for the first quarter of fiscal 2003. For the three months ended 12/31/03, the Company generated EBITDA -- that's earnings before interest, taxes, depreciation and amortization -- of $9.2 million. That's compared with EBITDA of $9.8 million for the first quarter of fiscal 2003.

A few words about cash flow and liquidity. The Company used approximately $1.8 million of cash in the first quarter, and consistent with our historical seasonality, inventories increased by approximately $8.7 million. The use of cash, however, was limited to 1.8 million due to non-cash charges of approximately $7.2 million and an increase in payables and accruals. Inventories are expected to decline significantly beginning in the second quarter -- that's the quarter that we are now in -- and throughout the fiscal year, as a result of successful sales initiatives instituted by the Company over the past several months.

As previously announced, the Company entered into a new $100 million credit facility with GE Capital Finance on October 3, 2003. The credit facility consists of a $50 million term loan and a $50 million revolving line of credit. At December 31, 2003, the Company had borrowings of $9.5 million pursuant to the revolving line of credit and unused availability under the revolver of approximately $25.5 million. Net debt -- that is total debt, less cash -- at December 31, 2003 was $339 million, representing 92 percent of total capitalization.

A few words about market conditions and our outlook. While industry demand for OPP films remains sluggish during our first quarter, we nevertheless expect substantial volume and revenue growth beginning in the second quarter and for the balance of fiscal 2004. Likewise we expect continued improvement in gross and EBITDA margins for the balance of the year. EBITDA of $9.2 million for the quarter was $4.1 million, or 79 percent, higher than the fourth quarter of 2003; however, it was approximately 6 percent below the first quarter of last year. We expect significant increases in EBITDA over the reminding quarters of the fiscal year on increasing sales volume. Quarterly EBITDA comparisons for the balance of the fiscal year are therefore expected to be substantially better than the prior year.

We remain encouraged by the commercial prospects for our high-value proprietary products. We will continue to carefully control capital expenditures and constantly reevaluate our cost structure. We remain focused on executing a successful turnaround in a difficult business environment. Our …