Mativ Holdings Inc (MATV) 2011 Q1 法說會逐字稿

Welcome to SWM's first quarter 2011 Earnings Conference Call. Hosting the call today from SWM is Frederic Villoutreix, Chief Executive Officer. He is joined by Pete Thompson, EVP Finance and Strategy and Scott Humphrey, Corporate Treasury Director.

Today's call is being recorded and will be available for replay beginning at noon Eastern Daylight Time. The dial-in number is 800-642-1687 and pin number 63725591. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions).

It is now my pleasure to turn the floor over to Mr. Humphrey. Sir, you may begin.

Thank you, Wes. Good morning. I am Scott Humphrey, Corporate Treasury Director at SWM. Thank you for joining us to discuss SWM's first quarter 2011 earnings results. Frederic will discuss the key factors impacting our business. Pete will then provide additional detail related to our first quarter results and outlook. We will then take your questions.

Before we begin, I would like to remind you that the 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 annual report on Form 10-K. Certain financial measures discussed during this call exclude restructuring expenses and are therefore non-GAAP financial measures. I will now turn the call over to Frederic.

Thank you, Scott, and good morning, everyone. On today's call I will share some eye level comments about our first quarter performance and cover our working agenda and priorities for 2011, including updates on the progress of our expansion plans for LIP in Europe. Pete will then take you through a more detailed review of our financial results and guidance.

Slide four summarizes our financial results for the quarter. Our first quarter financial results, which beginning this quarter are presented on the product line segment basis, reflect decreased revenue and earnings versus the first quarter of 2010 due to lower profitability for RTL, primarily due to the planned decrease in sales volume.

Earnings from our paper operations declined, primarily due to start-up expenses associated with European LIP capacity. We also experienced inflationary cost increases, now including higher energy costs and unfavorable foreign currency translation impacts, mostly in Brazil. Our operational excellence efforts again yielded benefits and provided a partial buffer against the unfavorable inflation and currency impacts.

Cash used increased during the first quarter, primarily from working capital increases, a $30 million share repurchase and capital spending to complete an orderly suspension of the Philippines RTL project. As a result, SWM swung from a net cash to a small net debt position.

I will next address key operational developments in our business and Pete will further review the financial results in a moment.

Moving to operational trends on slide five, our first quarter results reflect numerous business operational and economic factors that combined to reduce operating profit by $7.2 million with $5.1 million at a decline from lower RTL results. RTL sales volume declined 10% versus a very strong first quarter 2010, primarily reflecting, as we announced last quarter, reduced requirements from two major customers.

On the other hand, LIP volume increased 8% year-over-year, primarily due to a full versus partial rate of shipments to all markets currently under LIP regulation, as well as share increases in the North American markets among independent cigarette producers. As a result of an accelerated pace of preparation to serve a commencement of EU LIP demands, we incurred losses from start up and other support activity to ready capacity.

Wood pulp prices rose during the first quarter over the prior year but were flat on a sequential basis to the fourth quarter of 2010 while we also began to experience a meaningful level of energy inflation globally.

The U.S. dollar weakened 1.6% versus a year-over-year and favorably impacting revenue comparisons while weakening 10.1% against the Brazilian real, which despite some hedge protection, impacted operating results from that location. We sustained a pace of our operational excellence efforts and the resulting cost savings mitigated nearly half of the inflationary and currency impacts.

Overall SWM is on track to deliver significant earnings growth in 2011 from our high value product strategy, while managing a worsening inflation cost environment through operational excellence improvements. Recovery of inflationary cost increases through selling price adjustors will occur progressively through the second half of the year and into early 2012.

Although the first quarter earnings decline is not desirable, it does not change our perspective of full-year results, which Pete will cover in a moment. We have a full slate of activities and overall our execution was on the average during the first quarter to what SWM is capable of delivering. We expect the second quarter will continue to be similar in reserves through first quarter before ramping up significantly during the second half of the year from EU LIP sales demand.

Turning to slide six, a few words on both of our high value product developments, EU LIP and Asian RTL expansion; European LIP operational activity including completion of capital work, hiring and training of employees, finalization of customer specifications and qualifications, increase in urgency as we began to receive and produce initial commercial orders from customers now preparing for mid November 2011 compliance deadlines.

On the commercial front supply agreements with major customers have been secured and we have made progress establishing agreements with independent European customers. No change has occurred to our previously communicated expectations in terms of an approximate 40% share of the EU LIP market and more than $50 million incremental pre-tax earnings from the EU LIP opportunity.

Efforts continue to secure license agreements for the portion of the EU market now supplied by SWM. Due to the sensitive nature of these discussions, we will not comment about the specific status of parties involved other than to say we expect some level of satisfactory conclusion of discussions yet this year. Beyond EU LIP license discussions, we continue to actively prosecute various LIP legal proceedings in the U.S.

During the first quarter we significantly advanced actions to suspend our Philippines RTL project and move forward in securing formal government approval for our China RTL project. Suspension of the Philippine project, primarily construction activity, is expected to be completed during the second quarter. We now expect formal approval and in cooperation of our China RTL joint venture in the coming months, which should support commencement of operations by mid to late 2013.

Slide seven summarizes our key business drivers for 2011. We remain focused on executing against our strategies and continue to work hard to deliver our likely third consecutive year of record earnings in 2011 on the strength of EU LIP expansion. Further growth will likely follow as LIP regulation advances to new markets and we commence RTL expansion in China.

As seen by our new product base segment reporting, despite the decline in RTL results this product remains a key driver of SWM earnings. We remain diligent in monitoring and adapting to market forces impacting RTL and will be opportunistic as time goes by in how to best take advantage of non-China Asian RTL growth.

We also expect to put into place a new multiyear syndicated credit facility during the second quarter and then initiate execution of a $75 million share repurchase we recently announced. The two areas of concern that we'll carefully manage this year include energy inflation and execution of our strategies. SWM has an outstanding group of employees who continue to perform with excellence in carrying out our plans. We remain focused on further improving the quality of our execution as we move into the critical LIP market launch during the coming two quarters.

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

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

On slide nine net sales decreased 6.3% year-over-year for the first quarter. Excluding currency impacts, net sales decreased 4.9% for the quarter. The decrease is due to changes in product mix and sales volume, including the decline in RTL sales, partially offset by increased LIP sales and an unfavorable currency translation impact.

On slide 10, consistent with revenue change explanations, sales volume for both high value and conventional tobacco paper volumes were flat to down slightly versus the prior year. Within high value products RTL sales volume declined 10%, while LIP volume increased 8% with about one-third of this increase due to market share gains in North America.

Traditional paper products including volumes at CTM declined 4%, in part reflecting our continued strategic shift away from commodity tobacco papers in certain markets. Changes in overall volume are consistent with broader market expectations. From an end customer shipment standpoint the major multi-national and U.S. producers are reporting developed market cigarette consumption declines of 3% to 5%.

RTL demand is impacted by the decisions of two of SWM's primary customers to reduce their orders due primarily to available low-cost, high quality virgin tobacco due to bumper crops in both the Northern and Southern Hemisphere producing regions.

Unit sales for our China joint venture grew 50%, whereas the overall china market consumption of cigarettes grew 2.8% during 2010. Our growth reflects our continued market share gains throughout 2010 and that the first quarter 2010 sales were impacted by high customer inventories at the end of 2009.

Slide 11 covers causes of operating profit changes. Adjusted operating profit declined $7.2 million versus the first quarter of 2010. The decrease was due to $6.2 million from increased inflationary costs, both wood pulp and energy, unfavorable currency translation impacts and EU LIP start-up costs, partially offset by $4 million in cost savings from operational excellence efforts.

North American NBSK wood pulp prices averaged $970 per metric ton for the first quarter, an increase of 10.2% over the prior year and unchanged from the fourth quarter of 2010. Pulp prices increased at a slow rate through the first quarter of 2011 reaching $990 per metric ton in March. Energy costs rose $2.2 million during the first quarter over the prior year with the increase occurring across all SWM locations and products and driven by higher fuel costs, both oil and natural gas, for the portion of SWM's requirements not under fixed pricing agreements.

Slide 12 covers trends in product line operating profit. Beginning with the first quarter 2011 and reflective of how we now manage our business, we have changed segment reporting to a product line versus geographic basis. the graph on slide 12 provides perspective on the recent trend in paper, RTL and total SWM operating profit and highlights that our first quarter results, although down versus the first quarter of 2010, are within the range of recent experience. Of the $7.2 million decline in total SWM operating profit between the first quarters of 2011 and 2010, RTL fell $5.1 million and accounted for the majority of the decline.

Further, the level of RTL operating profit decline will likely temper, given that first quarter of 2010 was the peak quarter for RTL over this time. Paper results, which include LIP products, also declined but would have been flat to the prior year, both in absolute or profit and return on sales if European LIP expenses are excluded. This chart will provide a good perspective going forward in terms of the projected growth of paper results and expected stability of RTL results around the first quarter 2011 levels.

Slide 13 highlights earnings per share trends. First quarter 2011 earnings per share, excluding restructuring and impairment expenses, totaled $0.97 versus $1.19 per share during the first quarter of 2010. As the trend in EPS shows, first quarter 2011 results are not out of line to recent experience, despite the decline in RTL results. As 2011 progresses, this slide, like the previous operating profit trend slide, will highlight the impact of EU LIP demand as well as the benefit of completed and potential further share repurchases.

Slide 14 shows adjusted EBITDA from continuing operations, which totaled $36.8 million for the first quarter of 2011. Like EPS roughly in line with recent experience and not yet benefiting from the advent of EU LIP demand.

On slide 15 SWM swung from a net cash to a net debt position during the first quarter of 2011. This was due to essentially breakeven cash generation from operations, which was caused by a $26.5 million increase in working capital requirements including one-time payments of accrued tax and employee severance liabilities, as well as seasonal increases in trade working capital amounts, a $30 million share repurchase and $27.7 million in capital spending, including $19 million associated with suspending the RTL project in the Philippines and $4.4 million for EU LIP capacity additions.

Borrowing activity is expected to further increase through mid 2011 before declining by year-end. The near-term increase is expected from further working capital increases associated with preparing for EU LIP demand and the potential for up to $75 million in share repurchases. We are well advanced in renewing SWM's credit facility and expect this to be in place to enable share repurchases during 2011.

On slide 16, as noted, uses of cash are expected to remain high over the next several quarters. Despite one-third to one-half of full-year projected capital spending having already been incurred during the first quarter, we expect significant operational cash used for further capital spending, payments of the approximate $15 million in employee -- remaining employee severance amounts, and China joint venture funding, in addition to the $75 million share repurchases. The range of projected cash uses does not include the expected sale of up to $40 in RTL equipment for use in the China RTL joint venture,

On slide 17 return on invested capital declined to 15.5%, which is still above SWM's cost of capital, during the first quarter due to increased invested capital and a lower level of net income. Return on invested capital is expected to achieve year-over-year growth to 2010 levels by the end of 2011 on the expected earnings gains from EU LIP.

On slide 18 we reiterate full-year earnings guidance of at least $5 per share excluding restructuring and impairment expenses with a significant ramp in earnings occurring during the second half of the year from EU LIP sales growth. No significant restructuring expenses are expected and the first quarter evaluation of the suspended Philippine RTL investment shows no accounting impairment.

The key risk to 2011 earnings continue to be inflationary cost increases with energy now likely more of a risk than higher pulp prices, continued EU LIP start-up expenses through the second quarter and the potential for higher legal expenses related to LIP patent actions. These risks are not projected to result in SWM's 2011 earnings differing materially from our expectations.

That concludes our remarks. Wes, please open the line for questions.

(Operator Instructions). Our first question comes from Bill Chappel of SunTrust.

I guess one area where I am still a little on the confused side is on the currency translation side. Now, I guess I understand transaction hit but with 50% of your profits coming in Euros and translating that back I would think there would be a net benefit, at least this quarter, if not for the rest of the year and so maybe you can help me understand that.

Yes in terms of the translation impact, the biggest impact was really in Brazil of the $2 million impact. About two-thirds of it was out of Brazil so there was really a neutral impact in terms of translation of euro profits. There wasn't much of a variation in terms of the currency relationships quarter-to-quarter and therefore there wasn't much of an impact. Further we had a fairly small change in the absolute level of earnings so earnings were down this year versus last year in euro, especially because of the RTL situation. So that the net effect of all that is it's really on a translation basis from Brazil.

Going forward we'll have better comparisons so that what you're looking for is if the dollar stays at $1.40 or above, which it is to the euro, that will be beneficial as the year goes on. But we haven't seen it yet.

Well, I guess that leads into another question of with your guidance of at least $5 it leaves plenty of room for I guess what that means. So I am just trying to understand with higher pulp prices with the quarter kind of roughly in line with expectations, with currency, I mean are things right in line with what you expected? Are they a little bit worse with some of the issues or just trying to piece meal this to understand whether we're looking more positively or less positively, especially with currency and commodities kind of varying over the past three months?

We're essentially right where we expected to be. The first quarter of the year reflects kind of net. It reflects only the bad things. It reflects lower RTL demand, which we've been very clear in explaining, and it's relative to the best quarter of 2010 for RTL. Inflation is worse with pulp being slightly worse but energy being much worse than what we had expected; currency flat but with the expectation that it will be better going forward, and then the other key driver that occurred in the first quarter is the fairly significant start-up expenses in Europe for LIP, which will flip to flat and then flip to a significantly higher level of earnings.

So, in terms of our year kind of broad brush, year expectation, we made about $1 a share in the first quarter. That's down from where we were at $4.35 a share for all of last year. It's essentially because of RTL. We're still guiding to more than $5. We're quite comfortable that we'll be at more than $5. To do that it means, just as we've said, we'll have to really be exiting the year making $6 a share or more in order to hit that $5 mark. So no we're not starting off in a hole in the first quarter. The ramp, the hockey stick, has always been coincident upon LIP in Europe.

From a trend standpoint, the thing that's now clear is the order demand and the schedule of work in Europe is at a very urgent pace. We're ramping up as fast as we can and, in fact, we expect to be at full staffing and full capacity availability, not efficiency. We're still on a learning curve but we have full capacity availability by June, so we're moving fast now in Europe and that's great because obviously as we move fast and fill orders the profits follow.

And then just two others; I mean, on European LIP has there been any push back change in terms of the contracts, the market share kind of where you expect that to be and pricing, as there's been kind of push back and forth on patents or is that all kind of the same as it was two or three month's ago? And then a quick one, tax rate was a little bit higher or a lot higher than I expected for the quarter. Was that just mix of business? Thanks.

Yes let me take the tax and then I'll turn it over to Frederic on LIP customer situation. The tax rate was higher, be two primary reasons; the technical reasons that will go away. In the Philippines for the recon investment, which is very small in terms of the operating impact, and in Poland we have tax credits. We can't utilize tax credits on losses. You just think of it intuitively.

So we have to -- when we book a loss we book no tax offset to that loss, no net operating loss carry forward. So $1 or a euro of pretax loss is the same after tax. That's causing what appears to be a higher effective income tax rate in the first quarter because it's primarily losses out of Poland. That will swing to a significant tax benefit once we have taxable earnings, which we expect again to have in the second half of the year. So the first quarter tax rate is high because of that technical issue with losses in two countries where we have tax credits. Otherwise, we'd be in that 34% or 35% effective tax range.

And to your question on LIP contracts, pricing, volumes, market share in Europe, I would say we are perfectly in line with what we announced last February. Contracts, some of them have been executed. Others are in the final stage of executing written contracts but really the focus on both sides are SWM and our customers is really on the inventory build and preparing for a switch to LIP compliant cigarettes to take on the shelf, to take place mid November of this year. And if there was anything I would comment is that we have impacted probably more positive developments in February in the sense that the schedule is now firming up.

The orders, commercial orders, have been already placed and we should see the benefit of those starting in the second quarter and, as Pete said, we are looking at being in steady state in terms of sales volume in the late second quarter, early third quarter. We also have had good progress in our discussions around licensing agreements and, as we said in our talking points, that we expect to have some of those, some of the markets covered and their license agreements ahead of the November 2011 implementation.

Thank you.

Rick Skidmore, Goldman Sachs.

Frederic, can you just talk about -- you mentioned the facilities ramping up to being full capacity or available capacity in June but how much additional capacity ramp will we see and sort of the time to be at full capacity in EU LIP?

To make it simple, you should look at the first quarter was essentially to start up the production equipment, qualify the products at customers and that is essentially complete. The second, so it essentially it was really no revenue per se. The second quarter we will have a mix of production for inventory build purposes and commercial orders with revenue generation to our customer base. While we are ramping up, going through the learning curve and extending production schedules to the full capacity state, and that would be progressive through the second quarter.

The third quarter there will be heavy shift that most of the production will be translating to sales, as the inventory build will have been essentially completed in the second quarter. And in the third quarter our customers will be actively producing cigarettes using the LIP paper to put it on the shelves ahead of the November implementation date and so the view is that we cannot describe with precision when do we reach the steady state but clearly it will be late second quarter, early third quarter from the production point of view. From the revenue generation it will be in the third quarter.

Thank you. Just a few other questions, can you just talk about why your average selling prices were down year-over-year? Is that a function just of pulp prices maybe pulling back in 2010 and cycling through that or is there another reason that your average selling prices would be down?

It's essentially mix. In fact, the way to look at the negative impact is price mix is essentially mix and that's a combination of lower RTL revenue, which obviously carry higher profit margin relative to paper and within the paper business we gain strength on the LIP side, as we stated, but there's also there was an unfavorable mix with the very strong sales to Philip Morris USA during the first quarter. So essentially it's mix and it's not a reflection of any weakening in our pricing power to by product line or product segment.

Rick, to follow up on that, this is Pete. Within paper kind of boiling it down to the most pure way we can look at that, within traditional paper products year-over-year pricing was positive in the first quarter. If we compared just for paper, the cost of wood pulp, it was still unfavorable. In other words, you're right on both points. We have higher prices but pulp continues to rise so we're chasing catching up with pulp and then energy, of course, is further on top of that. But yes we actually saw price increases due to formulaic price adjusters be positive throughout the business. The reason that we're reporting average selling price as down is purely a mix effect.

Okay and maybe just a couple of other modeling type of questions; I'm a little surprised that paper margins are as -- appear to be as low as they are in the first quarter and RTL margins as high as they are. Any way that you can provide any thoughts on the breakdown in paper between LIP and your commodity paper in terms of either share of the revenue or volume?

No, no we can't and it would be misleading to do because the cannibalization, LIP cannibalizes base paper and especially in this year. It would be comparing a product that's essentially going down with one that's replacing it. I think another way though to answer your question is if it weren't for, as we mentioned in the prepared comments, if it weren't for the cost of the losses that we're seeing with Europe LIP, operating profit return on sales for global paper and absolute operating profit for global paper would be flat to up slightly versus the prior year. So you can imply within that that LIP margins are flat to up versus the prior year because obviously that's a key driver of the overall profitability of the paper segment.

And then just lastly on the cash flow statement, Pete, I think you mentioned your share repurchase is $30 million but your cash flow statement says $45 million. Can you just reconcile that?

Yes the difference is that other $15 million is the surrendering of shares by recipients of restricted shares in the first part of the year to pay taxes, income taxes. That's not a -- that's yes and so the Company buys those shares from the employees. That's our way of paying taxes.

Okay thanks.

Ann Gurkin, Davenport.

I wanted to start with the LIP in Europe, any chance that November date moves out or do you think that's pretty firm?

I think today this reflects a consensus within the industry the formal dates of compliance by the 27 members of the EU have not all been published but I think the directive from the EU is clear that they expect compliance by mid November and everybody is working towards that target.

And did you actually shift LIP product to EU customers in April or May?

Yes, as we said, we started to -- we have commercial orders and we started to produce and ship those commercial orders at the beginning of the second quarter. This will ramp up quickly throughout the coming few months.

It seems like Q2 could benefit more from these LIP shipments than we initially thought. Is that a change in timing or is that (inaudible)?

No I wouldn't. I'd say that we still are going to have significant losses through the second quarter because the -- even though the volume is starting to ship out, we're way low on the learning curve yet so we're hiring people in advance of them being productive, etcetera. We realistically won't see any swing to positive earnings on European LIP till the third quarter. The second quarter will still have losses by all likelihood.

Yes the way we look at it it's only on the revenue side we should have positive impact as we are shipping and dealing customers in Europe but the start-up expenses will likely grow as the activity is also ramping up. But nothing -- I mean, so far what I can say is that we are making good progress. We are tracking along our plans and I think the outlook remains good as we look at certainly the second half of the year, seeing, being in line with our expectations and what drove us to guidance of greater than $5.

Right, switching to RTL, volume was down as expected in Q1 but not down as much as we would have thought. Is that a change or was that in line with your expectations?

Well, I think it's in line with what we stated. We stated that volumes would decline between 8% to 10%. It declined 10% in the first quarter, albeit against a very strong comparative quarter. That's the first quarter of 2010 was extremely good but I think no the outlook remains that we are going to see a decline in sales and in operating profit this year.

Certainly at this stage we continue to restate the projections that we had delivered in February, which is an impact of somewhere between $10 million to $13 million in pretax earnings of which $5 million have been reflected in the first quarter. So I would say in terms of performance of RTL segment is likely going to improve compared to last year as we progress through the year.

Great. That's great. Okay, switching to wood pulp cost, do you think they'll peak at levels where we saw last year or do you have any kind of insight into that direction?

Right now it looks like the increases are going to be continuing to be very muted. We're seeing roughly a pattern of a price increase per quarter and then there will be a month or two with no change and the increases are fairly small, that obviously therefore the key question is how long do those increases continue? The information that we see from various public forecasting sources and from our pulp vendors is that prices will peak midyear but they are creeping upwards. And then, of course, the question will be do they decline or do they hold flat.

So, at this point it looks like it could well get to the level that it was at last year. July of last year was the peak around the world. Whether it will exceed that or not, the information that we're getting is that it would not exceed last year's peak.

Okay great and are you sill able to pass that through to customers?

Yes the adjusters will kick in partly midyear with a good percentage of our customers and then again at the end of the year, so unfortunately the lag now will be recovery starting in second or third quarter and then not fully until next year.

And then, Pete, I think you talked about new business for LIP in the U.S. Is that coming in in line with current margins of non [Altrea] business or are you having any pricing issues, margin issues?

No, as we said, we are seeing some share gains with independent customers in North America and so it is not the MOD product and is our proprietary Alginexa product and so therefore higher margins.

Yes and it is margins consistent with what we've already seen so no pricing erosion.

And then finally, just a patent question, any update on the timing as to when we might hear a review of seven, of the 753 patent?

No you may have noticed we provided additional information in the Q on the various litigations status and the next step, what is the process, so there's nothing more than we can comment at this stage.

Okay that's great, very helpful. Thank you.

(Operator Instructions). And at this time I am showing no further questions. I'll turn the conference back to management for any further remarks.

Thank you very much for attending the call. We certainly appreciate your interest in the Company. Have a good day.

And, ladies and gentlemen, thank you for participating in today's SWM conference call. This call will be available for replay beginning at eleven-thirty AM Eastern Time today through eleven fifty-nine PM Eastern Time May 16th, 2011. The conference ID number for the replay is 63725591. Again, the conference ID number for the replay is 63725591. The number to dial for the replay is 800-642-1687 or 706-645-9291. We appreciate your time. You may now disconnect.