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AEP Industries (NASDAQ:AEPI)

Q4 2007 Earnings Call

January 15, 2008 10:00 am ET

Executives

Nicholous Lamplough

Brendan Barba – President, CEO

Paul Feeney – Executive Vice President Finance, CFO

Analysts

Roger Spitz – Merrill Lynch

Nick De Leonardis – Bond Street Capital

[Vikus] Singal – Travelers

Operator

Good morning, my name is Jackie and I will be your conference operator today. At this time I would like to welcome everyone to the AEP Industries Inc. fiscal 2007 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer period. If you would like to pose a question during this time, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Mr. Lamplough you may begin your conference.

Nicholous Lamplough

Thank you. Before we get started I would like to remark briefly about forward looking statements. Except for historical information mentioned during the conference call, statements made by management of AEP Industries are forward looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements involve known and unknown risks and uncertainties which may cause the company’s actual results in future periods to differ materially from forecasted results.

Those risks include but are not limited to, risks associated with pricing, volume and conditions of the markets. Those and other risks are described in the company’s filings with the SEC over the last 12 months, copies of which are available from the SEC or may be obtained from the company.

Today’s format will be as follows, Brendan Barba, Chairman, President and CEO will discuss operations and then Paul Feeney, Executive Vice President Finance and CFO will discuss the financial results. After the prepared remarks, Brendan and Paul will be available for questions, so without further delay, I would like to turn the call over to Mr. Barba, Brendan.

Brendan Barba

Thank you. Good morning everyone, welcome to our fourth quarter and year end conference call. I hope at least that everyone has had a chance to read our release and we are pretty pleased with the results for ’07, we think they were quite strong in a pretty tough business environment.

Volume growth of 5% was probably our best overall achievement in a market that through September was minus 1.8 as reported by the resin companies, so that’s a pretty good thing. I would tell you that the vast majority of that growth came from new products. Our new products are really driving a huge amount of that.

We also achieved this with four substantial price increases, between $0.18-$0.20 a pound, depending on the grade of resin that we were purchasing. Again, another difficult thing to pass on these increases to customers. We had pretty good control on our costs which was of course beneficial to the company, there were a few things that we couldn’t control, costs that we cannot control, freight, we had surcharges again of 18% for freight. Freight bills, on every freight bill and of course our electric bills went up as everybody’s has as a result of oil prices moving up and just about everything went up in each region of the country electric bills went up.

We continue to have price increases after our year end and October there was another one in November of $0.05, now that was the fifth increase and now there’s a sixth increase effective January 1 of $0.06 a pound, this increase was originally scheduled to become effective on December 1, they pushed it back till January 1. Normally that’s not a good sign for a price increase as to whether or not they are going to be successful in passing it along, however we’re in an unusual market and that is that their suppliers are all faced with a cost push, their raw material costs are going up and they have very strong export markets and the US dollar is helping that dramatically.

So, we’re in the process now of evaluating this increase, we think that it’s got a possibility of holding and there’s also a seventh increase that’s announced for February 1, we do not believe that that increase will hold, it’s they’re more to backup the sixth increase than anything else.

I’d like to talk a little bit about our operations also. Start with Holland, as you all know we’re in the final stages of an auction process in Holland. We hope to know within the next couple of weeks whether or not we have a deal or not. It’s not the greatest environment to try to sell a business over there. I will tell you that Holland operates profitably, it’s self funding, we will not take anything less than what we have agreements on or approximate agreements on. So, there’s a possibility that that deal may not go through but we’re hopeful that it does.

We’ve also put in quite a bit or are in the process of adding capacity in some of our businesses. In stretch film, by the end of February, we will be making a product called Pre-stretch, it’s a specialty film, it completes our product line. It’s the only product that we’re missing in that marketplace. And we are also adding a [cash] stretch line by the end of ’08 for our California plant.

We have one PVC line that was installed a couple of months ago in Griffin, Georgia and that’s in production and we are adding about 10 million pounds of capacity in our can liner business and that won’t come on for about nine more months. In our co-ex business we are adding two, three layer lines, one that will be going to California, which opens up, that will be our first co-ex line in the California location and the other would go into our Pennsylvania plant.

Printing, we’ve installed a ten color press in our Kentucky plant, you will recall that was the plant that we acquired a year and a half ago from a competitor and we need this press to complete our product line, it’s about 90% complete, so we expect to be making film off that line sometime in March. We also are putting in a bag machine there and we’ve upgraded all of the extrusion equipment, the dyes, everything, so that plant is really set after the first quarter of this year.

You’ve heard we made reference to all these price increases with resin and it’s a very, very competitive environment for us right now, just about every business that we’re in is under margin pressure and there’s a lag, a lag in getting prices up and that’s a result of competition delaying on these increases, everybody’s fighting for market share and what appears to be a minus 1.8 percent overall marketplace, so it’s a touch environment, we expect ’08 to be a very tough year and it’s going to get tougher if there’s any kind of recession, well I guess no one really knows where that’s going.

At this point that completes my portion of the program I want to turn it over to Paul Feeney.

Paul Feeney

Good morning ladies and gentlemen and happy New Year. I’m not going to spend a lot of time on the numbers because we announced early yesterday and we think that most people have had a chance to digest the numbers and we released our 10K late yesterday afternoon so that’s probably old hat to most of you.

But as we look at this past year, one of the things that we always have to remember is, yes, AEP is on LIFO and this past year the LIFO reserve build was $7.9 million. That gives us a cumulative LIFO reserve of $18.3 million which essentially means that our P&L over a period of time has been hit but for $18.3 million and our assets are undervalued to the extent of $18.3 million. The LIFO effect in the fourth quarter was $2.5 million and that was also a reserve build.

We keep talking about LIFO and that is because it is a distorting factor, however we don’t want to pay income taxes on $18.3 million so we will probably stay on LIFO. We have done some calculations that you all might be interested in and basically what we did is we added back the current period LIFO reserve or liquidation to our gross profit per pound which as you know is the most important number that we use internally to establish in running our business.

Well, adjusting for the LIFO reserve in the first quarter of ’07, gross profit per pound was $0.21, second quarter it was $0.22, third quarter it was $0.21 and the fourth quarter was $0.19. Clearly without LIFO, without the effects of LIFO but including the normal effects of resin price increases and passing through those increases to customers and volume differentials, notwithstanding those issues, our business is a very, very consistent business. We would suggest that you in the future try to adjust any numbers that you may have for this LIFO reserve.

We are also very, very happy with the 11% increase that we’ve had to adjusted EBITDA and again that is another number that we think is very, very valuable in evaluating our business and adjusted EBITDA went from $78 million to $87 million.

Looking at our balance sheet, one of the things that you should all understand is that networking capital increased $7-$8 million and we still have a tax asset on our books in the area of $6-$7 million and we will probably be a taxpayer towards the end of the second quarter or the middle of the third quarter.

Buybacks during the year were $49 million, that’s stock buybacks, $49 million we spent in buybacks for a million, a little bit north of 1,100,000 shares. We’re comfortable with having done that. We did that without a significant effect on debt. Quite frankly I think our leverage ratios are actually down a little bit.

This time of the year we always like to talk a little bit about forecasting and giving you some guidance and I’m going to give you two numbers. Volume increases for 2008, we’re looking at somewhere between 4%-6% and we’re comfortable with those numbers. We do have the first month of the new year, we already know what those results are and yes we are comfortable with that sort of a number. And we’re looking at cap-ex in 2008, not to exceed $16 million. This is essentially the same sort of numbers we gave you last year.

We’re not going to be giving guidance on adjusted EBITDA, we would like to, the markets and the economy is very choppy, we can’t make sense out of them at the present time and we don’t like to give numbers that ultimately disappoint. So while we’re very, very confident in our business and our ability to run our business and the position that our business has in the marketplace at this time, we’re not going to be giving EBITDA guidance as of right now.

Going back to the buybacks, you’ve looked at our 10K, in it we announced that our Board has authorized us to go up to $8 million in buybacks, assuming we’re still in compliance with our debt covenants, however there again we’re looking at an environment where cash is going to be king and while we can do a buyback program at any time and we may actually do one next week, that will be a flexible decision made by the management of the company depending on where we are at a point in time. We are not announcing a buyback program where we will just continue to dedicate a certain portion of cash flow to a buyback, however we will consider, we will continue to consider buybacks but we will also monitor the current cash position in the company, our capital requirements and the capital markets themselves.

Regarding the Netherlands, there again this is a company that has been fairly EBITDA positive this past year and the last couple years. We’re a little bit disappointed in the process as it has taken place, however there again capital markets and local economies have worked against this program and we’re not going to give this company away, we are prepared to keep the company if the transactions that we’re working on at the present time fail.

As we entered this calendar year 2007 our stock price was in the area of $52-$53 a share, during the year we increased adjusted EBITDA 11% to $87 million, we increased volume, probably the only company in the entire packaging business that did, but we increased volume 5.3%, we bought back north of a million shares and that would about 15% of shares outstanding, probably better than that, close to 20, well 15% of shares outstanding and we maintain continued control of our business. We’re looking right now at a stock price in the low $30’s, we think that we as a management team have done the right things, the market just plain and simply, for its own reasons, are not rewarding that type of performance, however we intend to run the business in the basic way in the future as we have in the past and we’re just going to let the stock market, will eventually correct itself.

That all being said, I think that’s about the end of my presentation and we would like to throw this conference call out to answer any questions you may have. Thank you.

Question-and-Answer Session

Operator

Thank you. At this time I would like to remind everyone, if you would like to pose a question, press star then the number one on your telephone keypad. Your first question is from Roger Spitz with Merrill Lynch, please go ahead.

Roger Spitz – Merrill Lynch

Hey guys, on the cash taxes, you said you were going to start being a Federal cash tax payer in the fiscal Q2 or fiscal Q3 ’08, would that rate, to get some guidance on that, would sort of be in the 38% cash tax, 38% of pretax income or will it ramp up to that as you go through your final NOLs.

Paul Feeney

Yeah, it’s going to be in the 38% area. That’s where it will be. It’s not going to ramp up to that. Once we become taxable, that’s going to be number, once we’re taxable.

Roger Spitz – Merrill Lynch

I meant that perhaps in one of those periods you’ve still got some NOLs to go through, that’s what I meant to ramp.

Paul Feeney

Yeah, for the period it will not be quite that high, that’s correct. Until the tax asset is completely extinguished it’s not going to be at 38% but once the tax asset is completely extinguished it will be about 38%.

Roger Spitz – Merrill Lynch

Okay, great and last quarter conference call you mentioned that you were expecting to receive $1.5 million in the November December 2007 timeframe, has that occurred? Excuse me this is from Spain.

Paul Feeney

We did not receive the entire $1.5 million, my recollection is we received a little bit north of 200,000 EURO and I think we’re still owed in the area of a little bit north of 250,000 EURO.

Roger Spitz – Merrill Lynch

To come, got it. Okay great thanks very much guys.

Operator

Thank you, your next question is from Nick De Leonardis with Bond Street Capital.

Nick De Leonardis – Bond Street Capital

Hi guys, just wondering if you could give a little bit more detail around the [pound] growth that you saw, just kind of wondering more if the size of the pie is growing of if you’re taking a greater share.

Paul Feeney

We believe we are increasing our market share, quite frankly we believe the market, our position in the market, the market has changed from a price management market to a market share environment.

Let me just give you the numbers, the volume numbers for ’06-’07. ’06 is 163, 745 first quarter; 174, 992 second quarter; 198, 077 third quarter; 191, 123 fourth quarter; total, 727, 937.

’07 is 175, 111; 190, 183; 201, 440; 199, 645; total 744, 379.

Nick De Leonardis – Bond Street Capital

Sounds like you have a pretty steady increase year over year and every quarter.

Paul Feeney

Yeah, we did pretty much what we expected we would do in every quarter, yeah.

Nick De Leonardis – Bond Street Capital

Is there a certain product or certain strength of yours that you would point towards your market share gains?

Brendan Barba

We’ve done it in a lot of the divisions without getting more specific than that.

Nick De Leonardis – Bond Street Capital

Okay then just real quickly, around the past [threes] you mentioned that it’s getting difficult with, you’re changing kind of from price management to a market shares, do you think the at a point at which kind of resins hopefully stabilize and stop increasing, you know obviously we can’t predict when that will happen, and if that does happen, do you think it will return back to a price management sort of market?

Brendan Barba

No, well first of all we do think that this increase is the last increase and that prices will stabilize for the rest of the year. That’s our internal forecast for what’s going to happen and if anything there would be a somewhat of a give back on resin after that. But it’s not going to be anything like the free for all that took place after the last run up in pricing that took place. It went up dramatically then it came dramatically. We see it being, them giving back a little back at a time. They’re going to have strong exports, they’ve got high costs and we just don’t think they’re going to be giving it away this time.

Nick De Leonardis – Bond Street Capital

Thank you.

Operator

Thank you. Your next question is from [Vikus] Singal with Travelers.

[Vikus] Singal – Travelers

Hi, I have just a few questions here, first question is regarding Holland sale, I am wondering what is the rationale behind that, it seems like the EBITDA margins are higher in Holland if I look at the European segment and the second is how are you planning to use the proceeds of that sale?

Paul Feeney

Let me just answer those questions, going back, we would basically use the proceeds of that sale to pay down debt and that would be local currency debt in Holland itself and to pay parent company debt, that’s really what we would do and we might actually use some of the proceeds if we have extra cash to buyback more shares.

The reason we’re selling the company is there’s not great synergies between our European business and our North American business and so since there’s no synergies, there are very few synergies, there’s no mutual help that we can actually give that business and sometimes when you have that situation, it’s better to put the business in a group of companies where they can actually do more for the business than we can and this process was begun on that basis.

[Vikus] Singal – Travelers

Remind me of what percentage of your sales goes to food and beverage which is kind recession proof and what percentage goes to industrial which might be more cyclical?

Paul Feeney

Well we really don’t give out that market kind of data.

Brendan Barba

We actually don’t, we can’t gather it, we make so many thousands of products that it would be impossible to tell what goes into each business.

[Vikus] Singal – Travelers

Alright, thanks so much.

Operator

Thank you, I would like to hand the floor over to Brendan Barba.

Brendan Barba

No other questions, Paul wished everyone a happy New Year earlier, I would like to do the same and thank you for your participation in the call, take care.

Paul Feeney

Thank you ladies and gentlemen.

Operator

Thank you, this does conclude today’s AEP Industries conference call, you may now disconnect.

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