Mativ Holdings Inc (MATV) 2009 Q2 法說會逐字稿

Good morning, my name is Chris and I will be your conference operator today. At this time I would like to welcome everyone to the Schweitzer-Mauduit Second Quarter Earnings 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 session. (Operator Instructions). Thank you. Mr. Spears, you may begin your conference.

Thank you, Chris. Good morning, I'm Mark Spears, Corporate Controller at Schweitzer-Mauduit International. Thank you for joining us to discuss Schweitzer-Mauduit's second quarter 2009 earnings results. Participating on today's call are Frederic Villoutreix, our Chairman and Chief Executive Officer, and Peter Thompson, our CFO.

Frederick will discuss the key factors impacting our business. Pete will then provide additional detail related to our second quarter results and outlook. We will then take you questions.

Before we begin, I would like to remind you that comments included in today's conference call constitute forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons which are discussed in more detail in the Company's Securities and Exchange Commission filings including our 2008 Annual Report.

Certain financial measures discussed during this call, excluding restructuring expenses and are therefore non-GAAP financial measures. Last, a more detailed review of our second quarter financial performance is included in our quarterly report filed with the Securities and Exchange Commission yesterday evening. A copy of these reports along with our earnings release can be found on our website.

Also, for the first time, we are introducing a slide presentation to accompany our formal remarks. A copy of this presentation can be found under the Investor Relations portion of our website or you can follow along on the webcast.

With that, allow me to introduce Frederic Villoutreix, our Chairman and CEO. Frederick?

Thank you, Mark and good morning everyone. On today's call I will share some high-level comments about our second quarter performance and we will also cover our working agenda for the balance of the year and highlight keys moving forward. Pete will then take you through a more detailed review of our financial results and guidance.

Moving to Slide 4, a summarizer of financial reserve for the quarter and year-to-date. I am proud of the results that we produced for the second quarter of 2009. Our operating segments are continuing to perform well and have a balance across all segments of our business.

For the second quarter in a row, we achieved a record earnings per share with $1.02 for the second quarter if we exclude restructuring any permanent expenses. These earnings are adjusted EPS to $1.90 for first half of 2009, a huge improvement over the depressed $0.09 in adjusted EPS reported last year.

Second quarter EBITDA remained very strong at slightly over $20 million in spite of a $13.3 million restructuring impairment charge. Our revenue continues this strong flat trend in line with our expectations. Last but not least, we continue to reduce our debt.

Moving to Slide 5. Operationally, the second quarter kept on the strong momentum from the previous quarter. Our employees continue to deliver outstanding results in a challenging environment. Growth of our high value products, that is Low Ignition Propensity papers or LIP and Reconstituted Tobacco Leaf products or RTL remain strong and in line with our expectations at nearly 10% growth over the prior year period.

We continue benefit from cost reduction initiatives especially continued improvement in the Radial Paper Division at PDM and generally more efficient operations across [these] business units. The operationally environment remain moderate even though conditions deteriorated somewhat from the previous quarter. The main challenge we face of course was the 15% volume decline across our base paper business. This decline is primarily driven by our own decisions to exit non-tobacco paper in Brazil last year, the closure of Lee Mills also last year, and the announced closure of Malaucene facility this year and subsequent decrease in tipping paper sales.

The decline in US consumption following the [s-ship] tax hike in April was the other significant contributing factor. These lower sales volume were expected and had a limited effect on our bottom line. Volume weakness in paper product sales will likely persist for the balance of 2009 and present a somewhat weaker pricing environment for next year.

Slide 6 shows a 5-year blueprint to transform Schweitzer-Mauduit to a global high performance solution provider to the tobacco industry. Restructuring activities in the evolved labels continue on track. As mentioned earlier, the actions completed in 2008 at PDM and Lee Mills and in Brazil are now making substantial contributions to our much improved earnings.

On July 22, we finalized a consultation with a World's council at our Malaucene finishing paper facility for revised closing costs of $25 million pretax.

The other timeline denotes the significant progress made across our restructuring program and remaining fewer initiatives more concentrated to growth. These are the actions we presented with the blue labels.

Growth is sales volume in our Chinese paper joint venture has recently accelerated and we are increasingly confident of achieving breakeven net income by late 2009. We remain upbeat on China, which continues to benefit from solid cigarette consumption growth and in improving regulatory outlook. We continue to advance our efforts for establishing a joint venture with two of the largest Chinese tobacco companies to put use reconstituted tobacco products with a 2009 approval still possible.

On the LIP paper front, with our July 16 announcement of the [nuclear] supply agreement with [DHE] Australia, or [Agenix] LIP papers, we have firmed our plans to start first European based production of LIP paper in the first half of 2010.

Turning to Slide 7, our near term and long term priorities remain unchanged. Near term is all about quality of the execution by maintaining a strong focus on cost control and operational efficiencies, growing our high value LIP and RTL franchises in current markets, and being prepared to adjust operations in response to continuing resiliency in market demand and customer needs.

Finally, we are going to continue to strengthen our balance sheet by paying down debt while making the necessary adjustments to maintain our competitiveness in our base paper business.

Looking ahead, we are planning to expand aggressively RTL and LIP to new markets, namely Asia for RTL and Europe for LIP, pursue our efforts to revitalize our base paper business and better meet customer demand, and identify additional ways in which to drive shareholder value and build long-term financial strength.

Slide 8, summarizes our key business drivers for 2009. Although we have already achieved considerable progress on our action agenda, our teams are working hard to address two important issues. That is the timely closure of Malaucene and filling the capacity of our paper joint venture in China. Final closure of the Malaucene facility is expected to negatively impact reserves until this action is completed during the fourth quarter of 2009. Pete will qualify the impact in his presentation.

On the other hand, I am confident that our Chinese joint venture will see much improved reserves in the second half of the year.

Last, we continue to evaluate how to best size and operate our base paper operations in France and the US to match changes in market needs.

All I know is we still have a lot of work to do, but we have made a lot of progress in a very short period of time. I want to recognize the people of Schweitzer-Mauduit whose passion, resilience and winning spirits are driving the (inaudible) change process in the way in our company.

With that, I will turn the call over to Pete to cover financial results and outlook.

Thank you, Frederic. I will now review our results for the quarter and update our financial guidance.

On Slide 10, Net Sales declined 9.3% from the second quarter of 2008 as a result of unfavorable foreign currency impact primarily due to an 11.5% strengthening of the dollar against the Euro as well as a decrease in unit sales volumes. These negative factors were partially offset by improved product mix and higher selling prices, which reflects the impact of our strategic shift towards higher value products.

We also are introducing a new metric to track our goal to grow revenue on a constant currency basis against which have achieved a 0.7% gain during the second quarter.

On Slide 11, overall volume trends declined primarily as a result of strategic decisions as Frederic mentioned including the exit in Brazil of our coated paper operations starting in the third quarter of 2008 as indicated with the substantial declines in the blue chart columns. Also the shutdown of the Lee Mills impacted our North American based tipping business plus the overall decline in consumption in the US market caused the majority of our core tobacco papers decline, which is represented in the tan chart column.

Outside North American, our core tobacco paper volume tracked general changes in global markets with only China currently showing year-over-year growth. As the red chart columns show, our high value of reconstituted tobacco and low admission propensity segments continue to grow with RTL unit volume increasing 4% and LIP unit volume essentially doubling versus the second quarter of 2008.

The percent of US consumption under LIP regulation totaled 49% at the end of the second quarter, essentially unchanged during the second quarter, and by the end of the third quarter, we expect that will rise to 58% based on states that have passed regulation before moving on to essentially 100% by early 2010.

On slide 12, we introduce a new presentation of changes in operating profit that highlights the key drivers in our business. Most substantially during the quarter improved pricing and product mix which reflects our shift to higher value products was the primary cause of increased profitability. Inflationary costs were a slight negative during the quarter as benefits from lower wood pulp costs were offset by higher energy, labor, and other material increases.

We did generate a substantial $7.4 million improvement year-over-year due to efficiencies gained from the last year's French machinery build as well as general cost reduction programs.

Non-manufacturing expenses increased reflecting higher incentive accruals as a result of our improved earnings as well as consulting expenses for strategic planning activities.

As Frederic mentioned, the volume impact on operating profit was slight as many of the unit losses were low margin sales. Currency was neutral to operating profit during the second quarter. The benefits in Brazil were essentially offset by unfavorable translations of Euro profits to dollar profits.

Further note that the Malaucene segment shows a year-over-year change, a negative change of $700,000, the absolute loss from the Malaucene operation during the second quarter of this year was $3.1 million.

Turning to Slide 13, as Frederic noted earlier, we again achieved record earnings per share excluding restructuring of $1.02 in the second quarter and now stand at $1.90 year to date.

Restructuring expenses to date in 2009 have totaled $13.6 million pretax or $0.58 per share. With $12.3 million or nearly all of that coming from our Malaucene severance accruals, which is roughly half of the $25 million that we've now settled for a full severance amount with the balance to be accrued essentially by year end.

On Slide 14, we're presenting trends in the trailing twelve month EBITDA performance excluding restructuring and experiment -- impairment expenses, the increase underscores the fundamental improvement in our business. EBITDA excluding restructuring and impairment totaled $107 million over the last four quarters. On a year-over-year basis, adjusted EBITDA increased by $14 million or 74% from the second Quarter of 2008. Continued growth in EBITDA is expected based on our full year earnings outlook.

On Slide 15, we continue to have access to capital under our revolvers to fund ongoing and planned restructuring initiatives. Total debt and net debt continue to be reduced, which coupled with rise in EBITDA led to a net debt to adjusted EBITDA ratio of 1.42 at the end of the second quarter of 2009. During the second quarter debt reduction was partially offset by increases in working capital. The working capital build in 2009 is expected to turn in early 2010 by at least $20 million from a refund of 2009 income tax payment that will result from changes in our French legal entity structure.

We continue focusing on debt reduction in order to have the capacity to fund strategic investment opportunities as they arise.

On Slide 16, we announced yesterday a $0.15 per share dividend continuing our long-standing focus to return ongoing value to shareholders via a dividend. We continue to control capital spending and other cash uses. Capital spending expectations have been reduced for the full year from $10 million to $15 million down from the $20 million to $30 million previous projections.

Other cash needs covering pension payments, restructuring severance costs and software development total $25 million to $30 million.

As noted earlier, we continue to use free cash flow to reduce debt.

On Slide 17, beginning this quarter we are introducing a longer term measure return on invested capital and will track progress toward our goal of consistently meeting or exceeding our cost of capital. Based on a rolling four quarter average, we have significantly improved our return on invested capital and are over half way to achieving our current of generating at least a 10% to 11% annual return.

We expect to continue to improve our shareholder returns as we work to sustain and further grow earnings and carefully manage investment decisions.

On Slide 18, we talk about financial earnings guidance. We now expect full year 2009 earnings per share above $3.50. This excludes restructuring impairment and includes a projected $0.42 to $0.47 per share impact from the closure of the Malaucene facility. This earnings guidance is improved over a first quarter guidance due to strong second quarter results and less uncertainty about the global economic outlook.

Over all SWM is benefitting from continued growth in LIT and reconstituted tobacco in current and new markets. The expected reduction in China JV losses as well as continuing beneficial currency exchange.

The challenges in our business outlook included expected continued volume weakness albeit not likely any worse than already experienced, softening selling prices mostly from in the near-term downward contractual price adjustment clauses, and a return of net unfavorable inflationary increases as pulp price benefits level off.

On balance we expect results for the second half of 2009 to be roughly in line with the first half except for projected higher losses from the Malaucene facility shutdown. That concludes our remarks. Chris, please open the line for questions.

Chris, do we have any questions?

I apologize. Your first line -- your first question comes from the line of Ann Gurkin. Your line is open.

Good morning.

Hi, Ann.

I want to start with your comments referencing potentially weaker pricing. Are you looking at 2010 besides the contract clauses -- adjustment clauses, are there ongoing negotiations with customers that may affect pricing?

Good morning, Ann. This is Frederic. I would say, as you know that most of our contracts, are multi-year contracts and they come up for negotiation usually in the later part of the year. So to answer your question, this is -- there's not discussion of it yet. It's more to happen in the Fall and the fourth quarter. And we're just -- what sharing with you is just a projection at this stage looking at the somewhat weakness in volumes and realizing that they're still excess capacity installed in paper production in Europe. And the fact that the contract we are executing this year were finalized last year at a time when inflation, both energy and pulp, was much higher than what we see today.

And I'd add to that the 2009 impact from pricing that we would see would be to the extent that we have any contractual price adjustments that have pulp price adjusters, for example, or currency adjusters that would reset mid-year, now that we've crossed mid-year, we could have those impact us going forward. That would be a relatively minor impact, but we could see some price changes. They obviously would be declines because pulp prices have fallen. That could be effective as of July 1.

Okay. In terms of volume assumptions, what do you have in the forecast for the second half of the year for cigarette volumes in the US and outside of the US?

On a sequential basis, we would not expect to see any further declines in volumes, so it depends on how you measure it. Year-over-year, it appears that the US market is down 8% to 10% in cigarette consumption and therefore, demand and we would expect that that would continue. But we've seen, we believe the worst of that and so our sales sequentially are at a level that we think will be stable going forward for the markets that -- primarily the US and Canadian market service from the US.

Outside of North America, it appears that unit volume has declined among the majors in the 1% to 2% range. That would be with Philip Morris International reported [viance], BAT and Japan tobacco, and our share being constant, we would expect that the volume decline that we've seen and would continue to see. So sequentially or from here forward to what we've seen, we would not expect significant further volume changes in the general tobacco market.

Okay. Moving to China, it's nice to hear that sales are accelerating and I think you said that may break even this year. What about for 2010?

Well, Ann, I think we -- our plans to fill the capacity of the mill all the time and for sure we don't expect to be running at full capacity by year end and necessarily there be some upside next year and I would say as an indication at this stage is to look at a operating profit in the mid-single digits.

To add to that, year to date now we've lost -- our share of the losses from the China joint venture are $2.4 million. To be clear what our expectations are -- are not that we will offset that $2.4 million and break even for full year 2009. Rather, we expect that the joint venture will be at break even and we'll have zero losses by the end of the year. Therefore, if -- even if all we did in 2010 was break even all year, we still have a substantial year-over-year gain in the absence of losses, let alone if we see CTM, our China joint venture generate a profit, we could see a pretty substantial year-over-year pickup in 2010 versus this year.

That's great. And then, what's will you use for RKL volumes for the second half of the year?

I think our projection is for the RKL volume to stay steady in the second half of the year.

In the single digit growth rate?

Correct.

Okay. And then, last, if I could just get an update really on your confidence in your LIP patents outside of the US at more of -- as more countries look to require the use of LIP, I would think competitive pressures would intensify. And so what is your -- your confidence level in patents on your process?

I would say our confidence level is good. We have some patents that were already granted in Europe. Some others are in the final stage of application and we have good reason to believe that we have a solid IP protection there.

Okay. That's great. Thank you, you all, very much.

Thank you, Ann.

(Operator Instructions). Your next question comes from Torin Eastburn from CJS Securities. Your line is open.

Good morning, Frederic and Pete.

Good morning.

Good morning.

In your French segment if you take out the charges and the Malaucene losses, you actually showed a pretty good improvement in profit compared to Q1, what drove that?

Well I would say the driver is clearly the improved operational efficiencies from our paper businesses in both PDM and (inaudible). Primarily if you look at year-on-year improvement, the bulk coming from PDM, with the solid issue that we faced in the first half of 2008 on one of the paper machines, which they is now history. We also believe to be from a strong a first half of reconstituted tobacco franchise of LTR. So I would say the three [meals] contributed to the year on year improvements.

Okay. Thank you. And the French tax situation, could you just remind us of how you thing that will play out and how it will affect your cash flows for this year and next year?

Yeah. The way that works is, we will be paying income taxes this year still at post the reorganization that allows us to beneficially use the net operating losses and will be building up a tax refund for -- that's equal to our tax payments this year and then we'll obtain that refund in the first -- probably the first quarter, but no later than April of 2010. Additionally starting in 2010, we'll no longer be paying cash taxes out of our French segment, so effectively in 2010, we'll have a $20 million refund plus the absence of $20 million in cash tax payments, so year over year we would have a $40 million gain in cash flow out of our French operations.

Great. I also saw in your cue that you've extended your currency hedges in Brazil. Can you just talk about how this is going to affect your operating profits there going forward?

Yes. Our current strategy is to continue to enter hedges as we are able to with our various financial partners into 2011 month-by-month as long as the Real and dollar are at a certain target level or above, which would be a level we believe we can maintain profitability, so we try to essentially lock in profitability on up to 50% of our net dollar exposure. We want to be somewhat conservative going that far out with hedges that we don't get into an ineffective hedge from a hedge accounting standpoint. So we've got a formula we're now applying month-by-month and we continue to enter into hedges and we have done so here at the beginning of August so we're not out into August 2011 in what should be hedge position and currency relationship that assures this will maintain some minimum level at worst of profitability in our Brazil operation.

Okay. Great. Thank you, both. We'll look forward to seeing you at our conference.

All right.

Thank you.

Your next question comes from Ian Zaffino from Oppenheimer and Company. Your line is open.

Great thanks. Great quarter.

Thank you, Ian.

Question would be on the LAT ramp in the US. Is that going to be more of a step function to get to the 100%? Or are we going to see kind of a slower kind of 45 degree angle there? How are we get that? How does it spread over the third and fourth quarter?

Good morning, Ian. This is Frederic. I think of news is that the fourth quarter will be the strongest of the two periods ahead of us. Many new states moving into tobacco regulations the effectives is of January 1, of 2010 and as we also signaled in the past there are some logistics considerations among our customers to standardize the production to the LAP standard when they reach a certain critical mass. So our anticipation would be that some growth in the third quarter but the biggest momentum would take place in the fourth quarter with some carryover into next year.

And how much working capital or stock of it do the cigarette manufacturers typically hold?

It varies and lot and I think recently the cigarette companies have been more disciplined in tightening down their inventory of non-tobacco materials so it's hard to give you a straight answer there. It's usually in weeks, a few weeks.

Okay. So you effectively see a couple weeks before manufacture.

Before cigarette production. Yes, before cigarette production that probably what's like there's two big factors that are driving the US that are going to make it logistically challenging. One is cigarette consumption is declining at a historically high rate, very high rate, and so regardless of the type of cigarette paper being used, there's fewer cigarettes being produced and that's a negative to demand for our product. At the same time, the cigarette producers are trying to manage a conversion from one product form to another and they have to meet a regulatory requirement for the new product form. Now that's an uplift for LIP cigarette paper at the same time the overall demands are going down, so it's a logistics challenge. Most likely what will happen is that we'll see less -- just as Frederic said, we'll see less pipeline load in advance of regulation because the cigarette manufacturers are going to try to match cigarette production more closely to demand at the retail level. So we'll probably see a fairly close tie between demand for our products which are converting to LIP in the US and the use of that cigarette paper to make cigarettes that are then sold at retail. So it'll skew everything, we think, towards the end of this year for the ramp up.

Okay. Great. Thank you, very much.

Okay.

(Operator Instructions). There are no further questions at this time.

Thank you, very much, Chris. We appreciate everyone for --

Actually, we just had someone queue up. I apologize for the interruption. David Sachs from Hocky Capital. Your line is open.

Sorry to pull in at the end. Quick question on the LIP ramp. If you're saying that the second half earnings should be similar to the first half and yet LIP penetration will go from 49 into the 90's, it doesn't seem like you're accounting for that incremental growth in LIP. Is that just a safety net or is just you're not sure how the ramp will play out and it's hard to forecast it?

Yes. I would say it's both a safety net a little bit and clearly that is in part why we set above $3.50 in terms of the earnings guidance. It's also affected by whether we call it being conservative or a true concern about the business, the fact that we still have a pretty volatile general economic environment and what might happen with taxation around the world on cigarettes and affect cigarette consumption and especially on the inflation side what could occur, we do face uncertainty as to could the underlying business fundamentals weaken from where they are right now?

Okay. And then secondary question. You provided a number that essentially the mix profit improvement of $16.4 million. How much of that was tied to RTL improvements versus LIP improvement?

The best way to get a handle on that is to, again, look in our cue at the MD&A, we do break out by geographic segment that that $16 million in terms of US, France or Brazil and it'll give you a sense, obviously for the US segment, most of that would be the shift towards LIP and especially away from the more commoditized type products that we were making last year when the Lee Mills were still in operation. So that will give you an idea. On the French side, it is quite blended and then we don't break out the specific portion that's due to recon versus paper. So you get -- it's harder there and obviously that's in line with our current disclosures that we do not break out specific product information on revenue or margin. So the cleanest way you can get a picture on it is the US segment and what the improvement was in price and mix there.

Okay. Terrific. And Australia's BAT selected you in Australia, who else is left to select in Australia and then from Finland to other countries that's coming up and when would you expect the decision to be made in Europe on who the suppliers might be for LIP product?

So let me answer that question. For Australia, BAT is a market leader in this country with the market coverage estimated at 60%. The other big player is Phillip Morris International and I'll say, Phillip Morris International at this stage has not officially announced their technology decision. We had some indication, but they will adopt the online technology which we -- the same as Phillip Morris USA (inaudible-accented language) have. And so we anticipate that we could fill part of their needs knowing that there's a competitor in Spain that has also production capabilities. So this is just speculation at this stage. No decision has been made.

In terms of Finland, it's a very small country in terms of consumption of cigarettes and there's been discussions with the major players there which are the main nationals and some are from the plants, still no production has started; it's too early, but not all of them and it's probably something that will more clear to us country the fourth quarter.

In terms of Europe, the European community is making progress in defining the standard for LIP regulation. We continue to believe as our customers that the LIP regulation is likely to become effective in late 2011 -- 2012. And again, when we look at these time line, likely the main customers will firm up their preliminary decision sometime in very late 2009, more likely 2010.

And then just last question, unrelated, but taxes. You mentioned the structuring that would allow us to potentially utilize our NOL in Europe and we would no longer be a cash tax payer starting 2010 in Europe plus the $20 million refund. What would the tax picture look like in the United States and what should we think about as a book and cash tax rates for 2010?

On a book basis, we'll probably track towards the low 30% effective tax rate. That should be pretty good. From a cash tax standpoint in the US, clearly as our taxable earnings are rising, we'll be back into a fairly substantial cash tax payment situation. We do have some foreign tax credits that we can utilize in the US, but we'll be back to paying cash taxes on the US side pretty much in line -- ask Mark if he wants to comment on that too,-- but pretty much in line with what our increases in taxable earnings will be.

Terrific. Well, thank you very much for a solid performance and good luck with the rest this year.

Thank you.

Thank you.

Your next question comes from the line of [Brandon Senise] from Cobalt Capital. Your line is open.

Hey guys, congratulations on the quarter.

Thank you.

Quick question on pricing going back to Ann's point earlier. I'm just trying to understand the lag effect and in the escalators and de-escalators built into your contracts due to pulp prices and necessarily what were the benefit you receive this quarter from higher pulp prices in quarters past and, you know if prior pulp prices were built into contracts now, what necessarily was the benefit that might go away?

That it's probably going to be in the range of -- this pretty back of the envelope, but I would say that we would be looking at in the second half of the year, maybe an $0.08 to $0.10 per share net hit to earnings that would be included in our $3.50 earnings guidance or above that would be the result of -- of just what you said, which is selling prices formulaically adjusting downward because the inputs to those formulas would cause it to go downward at the same time that those very inputs, like pulp, are starting to firm up or even go up slightly. So there is a contraction, but it's not huge in terms of our overall results, but we will see that in the second half of the year because we do have for some of the major accounts, adjustors that kick in on a six month basis, which would be July 1.

Sure, sure. Would that -- would that hit be in -- center around any one segment or be across all segments?

That would be across all segments.

Thank you.

Okay.

There are no further questions at this time.

Okay. Well, thank you very much, Chris. We appreciate everyone's participation on our call today. Let me say that we are excited about what's happening in our space, our ability to drive down cost and aggressively grow as our new products remains the focus for all of use here at Schweitzer-Mauduit. I think you will see that focus coming to our results and we will maintain that focus and continue to drive strong results for shareholders.

So thank you again for your participation and we'll talk with you soon.

This concludes today's conference call, you may now disconnect.