ARCHIVED NEWS

PLIANT CORPORATION

 

Moderator: Harold Bevis

November 14, 2006

1:00 pm CT

 

 

Coordinator:          Welcome and thank you for standing by. At this time, all participants are on a listen only mode. During the question and answer session, please press star 1 on your touchtone phone.

 

                              Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

 

                              Now, I will turn the call over to Mr. Harold Bevis. Sir, you can begin.

 

Harold Bevis:        Thank you (Genie).

 

                              I’d like to begin the day, as I have each time, by having Steve Auburn, our General Counsel read our required disclosure regarding forward looking statements.

 

                              Steve?

 

Steve Auburn:       Thank you, Harold.

 

                              Our press releases today includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. And we will use such statements in our call today.

 

                              Forward looking statements include statements concerning our plans, objective, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends or other information that is not historical information.

 

                              Our use of words, “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts” and variations of such words or similar expressions is intended to identify forward looking statements. All forward looking statements, including, without limitation, management’s projection of future operating trends, are based upon current expectations and various assumptions.

 

                              Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, management’s expectations, beliefs and projections may not be achieved. There are number of risks and uncertainties that could cause our actual results to differ materially from the forward looking statements contained in our press release and as used today.

 

                              Important factors that would cause our actual results to differ materially from the forward looking statements we make in this release are on this call are described in our annual report on Form 10-K for the year ended December 31, 2006 and in on our quarterly report on Form 10-Q for the quarter end of September 30, 2006.

 

                              Such risks, uncertainties and other important factors include, among others: General economic and business conditions particularly in economic downturn. Inability - excuse me, continuing losses and charges against earnings resulting from restructuring to the impairment of assets. Industry trends, risks of high leverage or any increase in our leverage. Interest rate increases, changes in ownership structure, raw material cost and availability particularly resin, the timing and extent to which we pass through resin cost changes to our customers, changes in credit terms from our suppliers, competition, the loss of any of our major customers, changes in demand for our products, new technologies, changes in distribution channels or competitive condition in the markets or countries where we operate, cost of integrating any future acquisitions, loss of our intellectual property rights, foreign currency fluctuations or devaluations and political instability in our foreign markets. Changes in our business strategy or development plans, availability terms and deployment of capital, labor relations and work stoppages, availability of qualified personnel, and increases in the cost of compliance with laws and regulations including environmental laws and regulations and other risks and uncertainties listed or described from time to time in reports we periodically file with the SEC.

 

                              There may be other factors that may cause our actual results to differ materially from the forward looking statements. All forward looking statements attributable to us or persons acting on our behalf apply only as of the date of today’s call and are expressly qualified in their entirety by the cautionary statements included in our press release. We undertake no obligations to publicly update or revise forward looking statements to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events.

 

                              At this time, I’ll hand it back to Harold.

 

Harold Bevis:        Thanks, Steve.

 

                              At this point, I’d like to read press release that we released to the market in the last hour - it’s being posted to our Website regarding our results for the third quarter.

 

                              Pliant reported solid third quarter results. Today, we reported our third quarter sales of $293 million. This represents a 12% increase over the third quarter of 2005 and a 1.5% sequential increase versus the second quarter of 2006.

 

                              Each division of the company reported increased sales as did all geographies including the US, Canada, Mexico, Germany and Australia. The sales increase was driven primarily by improvements in selling prices and a favorable product sales mix as volume measured in pounds was essentially flat versus the third quarter of 2005 and up 1.1% sequentially versus the second quarter of 2006.

 

                              Pliant’s EBITDAR has improved versus 2005. Preliminary EBITDAR results are $26.0 million. This represents a 20% increase over the third quarter of 2005 and a 3% sequential decline versus the second quarter of 2006. The company remains focused on growing EBITDAR via accretive sales growth, lean business practices, cost reduction and innovation.

 

                              EBITDAR is defined as EBITDA with the company’s financial restructuring and reorganization cost added back. These costs are mostly legal fees and financial advisor fees. Our growth and innovation programs continue to gain momentum.

 

                              And included in the third quarter with - included in the third quarter results were several important new product launches, including our trademark and patent pended launch of BreatheFresh family of produce films, which enhance shelf life and improve performance versus conventional films. Trademark and patent pending SteamQuick line of microwaveable (pref) packaging for frozen vegetables. Our patent pending in trademark Blockade agriculture films, which are high-barrier films and our Stratum NS trademark family of nylon skin films for fresh food packaging. All of these products support market evolution and are a result of Pliant’s aggressive innovation and technology programs.

 

                              In the third quarter, Pliant also extended several of our existing Marquee account relationships and was awarded new business in the personal care, food and beverage, and retail market segments. Our operational performance continues to improve.

 

                              The company’s continuous improvement programs in its plants advanced again in the third quarter of 2006. Our gross waste was 9.6% versus 10.4% in the third quarter of 2005. This calculation is the inverse of first-pass yield, and reductions in this number free-up capacity and lower material conversion costs.

 

                              Net waste was 4.3% versus 5.1% in the third quarter of 2005. This is the amount of resin that cannot be reprocessed in the company’s film making operations and reductions in this number translate into higher EBITDAR and lower the company’s resin purchase requirements. The company has a long-term goal to have net waste rates that approach zero.

 

                              Also in the quarter, we expanded our Chippewa Falls Innovation Center. We recently held the grand opening of our newly expanded center for innovation in Chippewa Falls, Wisconsin. This 10,000 square feet addition will house over $4 million of new pilot scale extrusion and packaging technology assets.

 

                              The investment is designed to keep Pliant on the forefront of packaging technology with state of the art equipment to ensure that we continue to provide leading edge packaging solutions to our customers.

 

                              We also continued our Balanced Capital Investment program. In the third quarter, company continued in its investment in growth, innovation and cost reduction, completing installation and startup of several capital expansion including: One, an 8-color flexographic press and two-bag converting machines to accommodate volume in the personal care and bakery markets.

 

                              Two, a three-layer blown extrusion line to create high quality converter-grade co-extruded films to support growth in frozen food and personal care market.

 

                              Three, a new state of the art, high-speed winder in our Germany plant extrusion operations to increase production capacity and improve our operational efficiency.

 

                              And four, in-house rewinding in our Australian plant to support growth in the retail and food service cutter-box markets.

 

                              The company spent $2.4 million on capital programs in the third quarter and approved and additional $11 million of new investments. That number is $10.4 million of capital programs in the third quarter.

 

                              Also, our resin and materials are trending favorably. Although resin base prices have been volatile, they are currently tracking below the June 2006 level and the near term outlook is for further declines. These declines have the effect of freeing up additional liquidity in the company’s working capital accounts.

 

                              During the quarter, the company again posted record purchases of resin from the Middle East, the Far East, Europe and the secondary market, and continued to aggressively diversify its supplier base. In addition, we have continued our excellent progress in waste reduction, which frees up capacity and lowers our net material cost.

 

                              Also in the third quarter, we completed our financial reorganization. On July 18, 2006, Pliant consummated its financial reorganization through a series of transactions contemplated in our court-approved Fourth Amended Plan of Reorganization including: One, we change the state of incorporation from Utah to Delaware. Two, we completed a debt-for-equity exchange in which all of the company’s 13% Senior Subordinated Notes and then outstanding Series A Preferred Stock and common stock were exchange for new Series AA Preferred Stock, New Common Stock and a new $35 million Subordinated Note and a $3.2 million consent fee. And three, we entered into a new revolving credit facility with expanded borrowing availability.

 

                              The new credit facilities provide up to $200 million of borrowing availability, subject to borrowing base capacity. As of September 30, 2006, the company had $55.2 million of unused availability under these facilities as well as $5.4 million in cash.

 

                              The 2006 full-year outlook is similar to our last meeting - our last call. Our full-year guidance is for $104 million to $107 million of EBITDAR depending on sales volumes realized in our resin price-sensitive markets.

 

                              In summary, I would like to say that we were pleased with our performance in the third quarter. We continue to invest in capital improvements, customer programs and innovation. We remain firmly committed to our strategically sound business plan built on accretive sales growth, lean business practices, cost reduction and innovation.

 

                              With that, I would like to turn the call over to Joe Kwederis, our Chief Financial Officer, who will elaborate with some financial information,

 

                              Joe?

 

Joe Kwederis:       Thank you, Harold.

 

                              Today I’ll be summarizing the third quarter of 2006 results with special emphasis on several one-time adjustments required due to our successful financial reorganization during the quarter. I’ll also review our business segments performance for the third quarter.

 

                              To facilitate the orderly restructuring of Pliant’s Capital structure, the company filed for Chapter 11 Protection in January and successfully emerged from bankruptcy on July 18th following the confirmation of Pliant’s Fourth Amended Plan of Reorganization. This process provided an avenue for a well organized financial restructuring without any noticeable impact to our customers or operations.

 

                              For the third quarter of 2006, net sales are $293.4 million. A 12% increase over the same quarter last year on essentially the same number of pounds sold. Average selling prices increased to $1.32 per pound also 12% above prior year reflecting the successful path to a resin price increases, year-over-year along with a shift to an improved product mix.

 

                              Gross profit of $34 million for the quarter was up $1.5 million or 4.7% due to the improved sales mix and the impact of continued cost savings initiative particularly in waste reduction. SG&A cost decreased by $700,000 to $17.8 million for the third quarter ’06 compared to the third quarter of ’05 and R&D expenses were down 6.8% to $2.2 million. Combined, the SG&A and R&D expenses per pound were down 4% year over year, better than our objective to hold these costs flat on a per pound basis.

 

                              As we had previously discussed on our last call, statement of position 90-7 of the AICPA provides guidelines for financial reporting while a company is reorganizing under the bankruptcy code.

 

                              In general, it requires that statements issued for period subsequent to the filing of chapter 11 distinguish between transactions and events directly related to the reorganization from those related to the ongoing operations of the business. Under these guidelines, we reported $18.4 million of financial reorganization cost during the third quarter mostly comprised of legal and financial advisory fees along with lesser charges due to the write offs of previously capitalized finance fees, bondholder’s consent fees and emergence incentive payments.

 

                              Operating income for the third quarter of 2006 was a loss of $3.8 million including the $18.4 million of financial reorganization cost. Excluding these reorganization costs, operating income was $14.6 million for the third quarter, an increase of $3.4 million or 30% higher than the third quarter of 2005.

 

                              Interest expense on current and long-term debt was $20 million. A decrease of $16.8 million compared to prior year. As a result of financial restructuring, the Senior Subordinated Notes and the Series A Preferred Stock were extinguished in exchange for equity and other consideration. This resulted in the elimination of $10.4 million of interest on the Senior Subordinated Notes.

 

                              In addition, we also eliminated $10 million of the dividends and accretion of the original issue discount on the Series A Preferred Stock. This was treated as debt pursuant to SFAS 150 due to its mandatorily redeemable feature and had been reported as interest expense. Partial offsetting this for the quarter were higher year over year interest for the revolving credit agreement as well as for the 2004 amended notes - often referred to as our first lean notes.

 

                              In accordance with the Bankruptcy Court Approved Plan of Reorganization, the Subordinated Notes and the Series A Preferred were exchanged for a combination of new Series AA Preferred, new common stock, a consent fee and a new subordinated note. This exchange resulted in the recognition of $398.5 million gain on extinguishment of debt. This gain is reflected in the income from continuing operations before taxes of $376.6 million in the third quarter of 2006 compared to our loss of $25.6 million in the same quarter of last year.

 

                              I’ll now review segment profit results for the third quarter. Segment profit is defined as income from continuing operations before interests, taxes, depreciation, amortization, restructuring cost and other non-cash charges. Results are reported based on three operating segments -- Engineered Films, Industrial Films and the Specialty Products Group.

 

                              Segment profit a total of $26 million for the third quarter of 2006, up 20.7% from the $21.6 million reported last year.

 

                              The Specialty Products Group includes the specialty films division and the printed products and barrier films division. Specialty films include personal care films, medical films and agricultural films. While the printed products and barrier films division provides printed roll stock, bags and sheets used to package food and consumer goods along with a variety of barrier and custom films.

 

                              Net sales of a $141 million for the third quarter were up $12.5 million or 9.7% over prior year and a 1.1% decrease in pounds sold. Segment profit of $16 million for the quarter was even with the same quarter last year as better product mix and improvements in SG&A costs offset the effects of the slightly lower sales volume and higher energy cost.

 

                              The industrial film segment manufactures PVC films used by supermarkets, delis and restaurants to wrap meat, cheese and produce, and stretch films, which are used to bundle, unitize and palletize loads. Sales of $83.8 million represented an increase of $8.1 million or 10.7% on 1.8% fewer pounds sold compared to the third quarter of 2005.

 

                              Segment profit for industrial films was $9.5 million for the quarter up $2.3 million or 32% over prior year. The lower sales volume was offset by continued improvements and Pliant efficiencies and increased sales of value added products and was further aided by a $1.9 million gain on the sale of excess real estate.

 

                              The engineered film segment provides flexible packaging solutions and numerous complex applications such as tapes, multi-material laminations and high performance film designs. Engineered film sales for the third quarter was $66.2 million, an increase of $10 million or 17.8% over the same quarter last year on 3.6% more pounds sold.

 

                              Segment profit of $7.8 million was $1.9 million or 33% higher than last year with 700,000 in higher sales volume increases and $1.6 million from the expansion of average selling prices above the average material cost more than compensating for $400,000 in higher energy cost.

 

                              Pliant’s liquidity position has been greatly improved since the end of last year. An enhanced revolving credit facility was installed with up to $200 million of borrowing availability subject to a borrowing-based limitation and other restrictions.

 

                              In addition, liquidity strengths are under our tightly managed approach to minimize working capital. Accounts payable, for example, increased by over $43 million for the end of last year largely as a result of the return of trade credit terms following emergence. At September 30, 2006, the company had $55.2 million of availability under the credit agreement and $5.4 million of cash-on hand for a net liquidity position of $60.6 million.

 

                              Finally, I’d like to comment on the unique way in which we were required to record the new $35 million Subordinated Note issued at emergence. Under accounting guidelines provided in SFAS 15 titled, “Accounting by Debtors and Creditors for Troubled Debt Restructurings.” These new notes were recorded at July 18th at the aggregate principle amount of $35 million plus accrued interest to maturity of $20 million for a total of $55.1 million.

 

                              I should also mention that pursuant to the terms of this note, we have the right to refinance it for $20 million within one year from its issuance date of July 18, 2006.

 

                              And I’ll turn the question and answer back to Harold.

 

Harold Bevis:        Thank you Joe.

 

                              That’s concludes our prepared comments and I would like to open up the call now to questions and answers.

 

                              (Genie) is our moderator today. (Genie), if you could join us?

 

Coordinator:          Okay.

 

Harold Bevis:        And if you wouldn’t mind, (Genie), I’ll leave the question and answer period to you.

 

Coordinator:          Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 now. You also will be prompted to record your name. To withdraw your request, press star 2.

 

                              Once again, to ask questions or to make comments, press star 1 now. And it can take just a moment for the questions to start coming through.

 

                              Please standby, okay.

 

Harold Bevis:        Sounds great, (Genie).

 

Coordinator:          Do you want their company names as well, sir?

 

Harold Bevis:        Yes, please.

 

Coordinator:          Thank you. One moment.

 

                              (Proceed now) with Merrill Lynch. Sir, your line is open.

 

Man:                      Good afternoon.

 

Harold Bevis:        Good afternoon.

 

Man:                      From the data included in your 10-Q File this morning, it appears that your resin raw materials spread might have declined sequentially, just slightly.

 

                              The first question is, “Am I looking at that correctly?” And the second question is, “What product areas might have you seen some spread compression during the quarter?”

 

Harold Bevis:        Yes, thank you for that question. I’m going to ask Joe Kwederis to respond to this.

 

Joe Kwederis:       You’re talking about sequential decrease from the second quarter, correct?

 

Man:                      Correct.

 

Joe Kwederis:       It is off very marginally. We measured that in the difference between our assigned price and our raw materials. It’s what we call our net delta. And it changed by 0.006 out of 0.58. So, less than, you know, 1%. It was a very small marginal difference.

 

Man:                      And what product areas were you seeing that mostly? Because volumes were up on a total basis and I think you mentioned that stretch film volumes were down. So that sounds like overall product mix is quite better, which maybe leads to me to believe that some areas might have seen a little more pressure than others?

 

Joe Kwederis:       I’m not sure if that’s totally correct.

 

                              You know, I think a lot has to do with timing and often in the way that the prices are not exactly aligned with the price increase into the rhythm. But you’re correct that the volumes were down and that’s the lower margin sector.

 

Harold Bevis:        And I’d like to elaborate that, Joe. The - obviously, we had a volatile resin environment where we did see declining resin towards the end of the quarter. However, 60% of Pliant’s business is contractual and it’s priced in advance if you will. And therefore, the margin compression or extension is largely dependent to the ending resin position in the quarter.

 

                              With regards to our transactional business and resin sensitive sales market that we participated in, those are a little bit tougher when resin is falling. That’s an industry - a phenomenon not just Pliant but, you know, mathematically speaking, you know, our numbers were essentially flat and we did not see a big squeeze.

 

Man:                      Okay. Thank you very much.

 

Harold Bevis:        Yeah. Thank you.

 

Coordinator:          Are you ready for the next question, sir?

 

Harold Bevis:        Yeah. How you doing?

 

Coordinator:          Next up is (Larry Clark) with (TZW). Sir, your line is open.

 

(Larry Clark):        Yes. Good afternoon.

 

                              In your guidance, it looks it implies a fourth quarter EBITDAR of $27 to $30 million based on what you have done year-to-date. In that guidance, is they’re any - are you including any nonrecurring items such as the gain on sales that occurred this quarter? And are you also - when you are giving this range and you’re qualifying it based on the sensitivity to customers or resin price sensitive to the customers is that the implication that the low end of the range would be if you - these customers don’t purchase the way you’re expecting them to purchase? Or is there a possibility you could come in below the low end of the range?

 

Harold Bevis:        Okay, thank you (Larry).

 

                              With regards to the first question in one-time items, we have no expectations in one-time items. We’ll take them if we get them but there’s none in the guidance, so we have not contemplated of better material.

 

                              Secondly, with regards to the range itself, you’re correct. If the range exists because of the outlook for resin being that it will fall - and it is in the industry - you know, this backed us very well that when resin prices fall on the margin transactional customers by less - that is our expectation. And those markets are - we’re expecting that to happen.

 

                              We monitor this on a daily basis. We do benefit and a counter balance given the attractive business model we have here because our contractual business tends to benefit at the same time. But basically, you’re comparing a net benefit and a sales price to a net loss at a variable contribution margin level of a pound of sales.

 

                              So, that’s a net slight gain for us when that happens - when those contractions happens. Largely a timing issue because industry volume retracts not just Pliant volume. And our markets (unintelligible), you know, are pretty disciplined and so our competition will be suffering the same kind of phenomenon.

 

(Larry Clark):        So, essentially unless there’s a very unexpected decline in customer volumes, the 27 appears to be kind of low end of your expectations?

 

Harold Bevis:        Correct. We have, you know, our - we have arranged that - that’s we’re very confident in that range (Larry).

 

(Larry Clark):        Okay. And the CAPEX, what do you think for the remainder of the year and into 2007?

 

Harold Bevis:        Well, we gave guidance out, if you can deduct it in our - some of our filings that we wanted to spend this year around $47 to $50 million of cash. This year, we will. Much of that is downpayments for equipments that is going to come next year.

 

                              And, you know, we have a full blast program. We’re going to send $50 to $55 million next year and forever. And we’re going to spend that at benchmark rate as the industry spends out plus a little bit. Pliant has a lot of great opportunities. We are a fast grower relative to our peers. You can look at the last 12 months of growth in the industry as Pliant compares favorably.

 

                              And we have a lot of momentum with Marquee account. We have momentum in our bakery business. We have momentum in our personal care business. We’re very pleased with the progress we’ve made. It’s been hard fought. We had some excellent competitors. But if you look forward on capital, it does require capital spending to modernize and have contemporary assets.

 

                              We have a balanced program to spend that money on both growth and cost reduction as well as some central kind of corporate investments in IT, and Sarbanes-Oxley procedures and that sort of thing, kind of run the business stuff. So, we’ll be spending $50 to $55 million per year kind of forever is our outlook.

 

(Larry Clark):        Fair enough.

 

                              And then finally, you’ve done a good job obviously on squeezing cash out of working capital particularly on the payables getting them back to more normalize. Can we expect getting a little bit of more cash, some working capital in the fourth quarter and maybe inventories or receivables, or just looking like more neutral on Q4?

 

Harold Bevis:        More neutral.

 

                              We’ve - our resin vendors have stood by us by a large of - on physical supplies as we went to our restructuring. And it’s my opinion they made prudent decisions on their actions and what they did with their credit exposure to us now that we have a dramatically improved credit profile. We’ve regained the terms by and large that our appropriate - given our position, you know, we have one or two outliers but we have agreed to trigger points with them to get back to normal. And that’s our expectation.

 

                              You know, we do have alternatives for basically any vendor that really doesn’t want to get back to normal but we don’t really foresee that as a problem at all. We’ve got excellent working relationships and we have innovation programs going with virtually all of our vendors.

 

                              And then we are growing and there’s - not everyone in the industry is growing. So, we are desirable customer but with regards to squeezing out working capital in the fourth quarter, you know, our outlook is for neutral.

 

(Larry Clark):        Okay, good. Well, best of success for Q4.

 

Harold Bevis:        Thank you (Larry).

 

(Larry Clark):        Yup.

 

Coordinator:          Please standby for the next question.

 

Harold Bevis:        (Genie)?

 

Coordinator:          One moment. One moment for the next question, sir.

 

Harold Bevis:        Are there any further questions in the queue, (Genie)?

 

Coordinator:          One more person. Actually, there’s no one standing by at this time.

 

Harold Bevis:        Very good. Thank you for calling in the Pliant’s Third Quarter Conference Call. We appreciate your support and we look forward to speaking with you again in the quarter. That would conclude our conference call today. Thank you.

 

Coordinator:          Mr. Bevis, would you stay in line for one moment please?

 

Harry Bevis:          Sure.

 

Coordinator:          Thank you.

 

 

END