Mativ Holdings Inc (MATV) 2011 Q2 法說會逐字稿

Welcome to SWM's Second 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 at noon Eastern Daylight Time. The dial in number is 1-855-859-2056 and pin number 85228387.

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 second quarter 2011 earnings results. Frederic 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 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 second quarter performance and cover working agenda and priorities for 2011 including updates on the progress of our expansion plans for European lower ignition propensity cigarette paper and Chinese reconstituted tobacco. Pete will then take you through a more detailed review of our financial reserves and guidance.

Slide four summarizes our financial reserves for the quarter. Improvement in second quarter revenue and earnings measurements primarily reflect gains in our RTL business, especially in comparison to weak second quarter 2010, partially offset by lower paper business performance. The RTL business benefitted from increased sales volume, strong manufacturing performance and favorable U.S. dollar to the euro change impacts more than offsetting inflation.

Our paper business reserves declined year-over-year as the advance of profitable commercial sales of LIP cigarette paper in Europe late in the quarter and continued improvement in manufacturing performance in our paper mills was not enough to offset cost increases from inflation, non-manufacturing expenses and European LIP startup activity along with unfavorable U.S. dollars to Brazilian Real exchange impacts.

Cash generation decreased compared to the second quarter last year, primarily due to planned changes in working capital while net debt increased primarily reflecting share repurchase activity.

Currency impacts explain approximately 80% of the increase in total assets enabled by our $225 million dollar credit facility we repurchased 1.4 million shares of SWM common stock from May through early July. For all of 2011 SWM has reduced total shares outstanding by 2.2 million shares or 12% of shares outstanding, which is expected to accretive to 2011 earnings by $0.40 per share.

Moving to operational trends on slide five, our second quarter results reflect progress in addressing unfavorable industry and economic factors by negatively impact our reserves as well as continued operational improvements. In total we are pleased with our second quarter performance and remain positive about our expectations for significant earnings growth during the second half of the year.

Second quarter results benefitted from increase sales of both RTL and paper. RTL sales volume increased a strong 18% compared to weak prior year quarter that was impacted by two customer's inventory reductions.

We continue to expect that full-year 2011 RTL sales volume will be somewhat lower than 2010 levels with some planned down time over the summer on the smallest of our RTL machines in France during the heavy employee vacation period.

The positive benefit of paper sales reflect that higher value LIP sales grew while other old paper sales volume failed reflecting continued consumption declines in key markets.

Inflation for the second quarter, primarily from energy and wood pulp, negatively impacted operating profit by $3.8 million. However, this is 60% of the first quarter rates reflecting some abatements, especially in the impact of pulp prices.

Foreign exchange impacts on SWM results swung to a net benefit during the second quarter as favorable U.S. dollars to the euro relationships more than offset continued unfavorable U.S. dollar to the Brazilian real impacts.

On the operational front, we shipped the first commercial orders for LIP in Europe during the second quarter and achieved a first possible month of operations during June at our new Poland facility, despite startup expenses totaling $1.7 million for the full quarter. The benefit of our operational excellence efforts accelerated during the second quarter and improved operating profit by $6.4 million, more than offsetting unfavorable inflation.

We continue to have a full slate of activities but our overall situation improved during the second quarter, which bodes well for completing the considerable work remaining this year.

Turning to slide six, we recently made significant progress on several of our key growth initiatives. European LIP activity moved from development to commercialization during the second quarter and we expect to fully utilize installed capacity by the end of the fourth quarter, given accelerating customer demand and the final installation and startup of all new equipment.

We continue to estimate our share of the European market to be approximately 40%, although we may be somewhat above this level during initial implementation and inventory build of LIP compliant cigarettes. We continue to foresee generating more than $50 million in incremental annual pre-tax earnings from the EU LIP opportunity.

In the U.S. we entered into a new UTL supply agreement with an existing major cigarette customer at pricing levels similar to the new LIP agreements in Europe and continue to gain market share at independents.

Efforts continue to secure LIP license agreements for the portion of the EU market not supplied by SWM. Due to the sensitive nature of these discussions, we will not comment on the specific status of parties involved, other than to say we expect conclusion of discussions yet this year.

Beyond EU LIP license discussions, we continue to actively prosecute various LIP yield proceedings in the U.S., which resulted in higher legal expenses during the quarter. After many years of effort, in July we executed an agreement with affiliates of China National Tobacco Corporation to create a Greenfield 30,000 metric ton RTL facility in Yunnan province.

The remaining steps to enable the start of construction include receipt of final government approval and incorporation of the new joint venture Company to be called CTS, or China Tobacco Schweitzer, along with our existing Chinese paper joint venture, China Tobacco Mauduit, or CTM. We are well on our way to establishing significant market position for a range of products in the world's largest and fastest growing tobacco markets.

We expect CTS to begin commercial operations during 2013 and SWM's equity investment is expect to range between $25 million to $30 million with funding occurring during the second half of 2011 and into 2012. Activity to suspend the Philippine RTL project is now largely complete excepting expected transfer equipment to CTS.

Slide seven summarizes our key business drivers for 2011. Our objectives and priorities remain clear and we continue to focus on improving our execution. We remain confident to deliver a third consecutive year of record earnings in 2011 on this plan of EU LIP expansion.

Further growth is expected to follow as LIP regulations advances to new markets and we commence RTL expansion in China. Although RTL performance is expected to be somewhat below first half 2011 levels, we are now optimistic that the full-year decline in earnings on the key SWM business will be less than previously expected. We remain diligent in monitoring and adapting to market forces in impacting RTL and with the opportunity as time goes by in how to best take advantage of non-China Asian RTL growth.

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 increased 12.9% year-over-year for the second quarter. Excluding currency impacts, new sales increased a still robust 6.1% for the quarter on higher RTL unit volume and reflecting the growth of high value LIP cigarette paper sales volume.

On slide 10 over the six quarters presented, changes in unit volume reflect the strong and somewhat exceptional performance of the second quarter 2011 led by an 18% increase in RTL sales volume, albeit relative to a weak prior year quarter, total SWM sales volumes increased 10% for the quarter. We noted in our earnings release that paper sales volume declined 9%, which was reflective of all non-China markets given our China paper joint venture results are not consolidated. However, if we include unconsolidated CTM results volumes declined a smaller 4%.

Within SWM's global paper franchise, cigarette paper sales volume was unchanged relative to second quarter 2010, again including CTM. As LIP sales volume growth totaling 27% in part reflecting increased European market share, fully offset market related consumption declines, which continue to range between 3% to 5% in developed markets, we likely also have realized some level of double sales for cigarette paper in Europe as customer's transition to LIP production.

We expect that full year 2011 sales volume will ultimately reflect the decline in RTL sales but somewhat less than our previous range of 8% to 10% below 2010 levels. We expect that our paper sales volume will be flat to slightly decreased for the full year, as LIP fueled market share gains and China growth offset secular market declines.

On slide eleven second quarter adjusted operating profit increased $4.4 million due to $7.3 million from higher sales volume, selling prices and favorable product mix combined with $6.4 million in cost savings. These positives were partially offset by higher non-manufacturing expenses, inflation and European LIP startup expenses.

North American NBSK wood pulp prices averaged $1,025 per metric ton for the second quarter, an increase of 3.5% over the prior year and up 5.7% from the first quarter of 2011. Pulp prices are expected to be mixed during the balance of the year with some markets currently realizing slight decreases in pricing.

Energy costs raised $1.4 million during the second quarter, below the rate of increases realized during the first quarter. Energy costs are expected to continue to rise relative to prior year levels but within the range seen to date in 2011.

Foreign currency translation impacts were net favorable by $600,000 during the quarter, second quarter, a favorable $2.4 million benefit from a 12.8% weakening of the U.S. dollar to the euro more than offset an unfavorable $1.8 million impact primarily from our net U.S. dollar exposed Brazilian operation due to a 10.6% weakening of the U.S. dollar to the Real.

Slide 12 shows the strength of SWM's second quarter operating profit. The paper and RTL segments and SWM in total all improved on a sequential basis and RTL and SWM also both improved relative to the second quarter of 2010. Further sequential and year-over-year increases in SWM operating profit are expected for the balance of 2011.

On slide 13, similar to operating profit trends, SWM's second quarter EPS result is improved sequentially and year-over-year. Earnings per share is expected to increase going forward through 2011, both due to growth and earnings from European LIP and the expected approximate $0.40 per share accretion from completed share repurchases and despite a likely somewhat lower level of RTL results during the second half of the year.

On slide 14 adjusted EBITDA from continuing operations totaled $41.6 million for the second quarter of 2011, which like operating profit and EPS is improved relative to recent experience and not yet fully benefitting from the advent of EU LIP demand.

On slide 15 SWM net debt has now increased $139.4 million through the first half of 2011 and totals $103.9 million at the end of June. Total debt was 25.3% of capital and SWM's net debt to adjusted EBITDA ratio remains low at 0.78 as of June 30.

The next slide details specific uses of cash during the first half of 2011 that totaled $172 million and were funded by $36.9 million in cash generated from operations and a balance in borrowing utilizing SWM's new $225 million credit facility. Additional borrowing in 2011 is expected to range between $15 million to $20 million before reaching a peak and then likely declining by year end as cash uses decrease and cash generation from operations grows coincident with expected earnings growth.

On slide 16, the increase in net debt during the first half of 2011 reflects cash uses that include $88.7 million in share repurchases, a $41 million increase in working capital requirements including one-time payments of accrued income tax and employee severance liabilities as well as seasonal and European LIP related increases in trade working capital amounts and $42.1 million in capital spending including $29 million for the RTL project in the Philippines and $4.5 million for EU LIP capacity additions.

For the full year we now project all cash uses to range from $220 million to $240 million. Given the completion of the authorized share repurchase in early July and the winding up of heavy Philippine RTL and European LIP capital spending, cash uses during the second half of 2011 are expected to be lower than the first half of 2011.

On slide 17 return on invested capital to date in 2011 is remaining steady at 15.5%, above SWM's cost of capital but below prior year levels, primarily due to increased invested capital as net income is relatively unchanged so far in 2011 compared to 2010. ROIC is expected to achieve year-over-year growth by the end of 2011 due to the expected earnings gains from EU LIP on stable levels of invested capital.

On slide 18 we are adjusting our full year earnings guidance to be at least $5.40 per share excluding restructuring and impairment expenses solely to reflect the approximate $0.40 per share accretion from completed share repurchases. Otherwise we reiterate our underlying expectations for business performance during 2011, including expectations for an increase in earnings during the second half of the year from European LIP sales growth.

No significant restructuring expenses are expected and the second quarter update of the suspended Philippine RTL investment continue to show no accounting impairment. The key risk to 2011 earnings continue to be inflationary cost increases with energy continuing to be more of a risk than higher pulp prices, remaining European LIP start-up expenses and further legal expenses related to LIP patent actions. Given macroeconomic instability, the impact of currency is difficult to predict and therefore likely presents an equal range of risk or opportunity to our earnings guidance. 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 first maybe if you could give a little more color on RTL, just trying to understand why it's not going to be as bad this year as you had originally expected and kind of what's the dynamics affecting that and also, is this just a kind of a postponement? Are you still expecting an incremental drop going into 2012 or is overall it doesn't look as bad as expected?

I think it's a combination of several factors. On one hand, volumes are holding better than we thought, which is just a translation of the needs from our customers and gains at new customers and a reflection of the open markets, nothing substantial but certainly probably holding volumes a little bit better than expected. First half with performance really boosted by a combination of very strong operating performances and the favorable currency; in fact, probably if I look at the full year 2011 and the uncertainty we have as to year-end operating performance, the biggest unknown right now is how the Euro to the U.S. dollar exchange rate will hold during the course of the second half, knowing that in the first half we benefited from prior year.

So the business is resilient. The outlook for 2012 is I would say flattish. We have work to do to make up for some of the planned demand from major customers that we commented on in February but I would say at this stage, with especially the acceleration of our investment in China and the intention to use our French mill to build the pipeline of demand, that we have I would say expectation for a somewhat flat, maybe slight decline in volume next -- entering into 2012 but again nothing to say to the extent of what we commented in February.

That's great and kind of switching gears to LIP, can you give us an idea did European LIP contribute to earnings in the quarter or was it kind of netted out? And then it was profitable in June, probably not so in May and then kind of where are we in terms of, as we move into July and august, are we at full ramp right now or when will that be a kind of full ramp in terms of (inaudible) to the customers?

I would say the second quarter contribution from EU LIP was still not a profit so we were still incurring the start-up expenses. What we said is that June was our first months where we achieved a profit and obviously your expectation is that starting in the third quarter we see earnings strengthening out of the EU LIP activity. Right now we are still in the ramp up of our capacity going also for the learning curve in terms of efficiencies but we are seeing a steady and strong increase in demand, which we characterize as such that by entering our late third quarter, entering fourth quarter we will be at full run rate to meet the 40% share of the EU market.

And, Bill, just to -- this is Pete -- to follow up on that, within the second quarter more of the effect we started to see from LIP was on the revenue line and we talk about that in the Q and a little bit in the earnings release too. Frederic is exactly right; from an earnings standpoint, an operating profit standpoint, the good news is that European LIP became neutral to earnings but not yet a key contributor. Within the quarter and the month of June we definitely could start to see the benefit of LIP. And that's why going forward it's a bit of a light switch and the light is on now and so European LIP does start contributing pretty dramatically, especially as the volume grows and we reach a closer to end of curve operational efficiencies.

Okay this is last question, any update on countries converting outside of the EU? I know there had been some plans for South Africa, Eastern Europe, anything that you're starting to budget, as we move into 2012 for 2013?

Nothing really new other than the somewhat of a consensus that South Africa will implement an aggregation sometime next year, not clear yet as to the exact date.

Great thanks.

Alex Ovshey, Goldman Sachs.

Question on Europe LIP, you talked about being in the process of potentially securing licensing agreements out there in Europe to the extent you're successful, would you be able to comment how much of the market your licensing agreements would cover to the extent that you're successful in those negotiations?

It would be premature for us to comment on this. I mean the only name that we are saying is that we continue to have advanced discussions with several parties and that we remain optimistic that we will secure some of the market not directly served (inaudible) before the end of the year. However, I think it's fair to say in light of the LIP litigations and the actions engaging the U.S. that we do not expect that all our customers or competitors will resolve the open intellectual property questions on the commercial basis.

Okay and is there a way to get at what your LIP volumes did outside of the benefit from Europe beginning to ramp up in the second quarter? Outside of Europe are your LIP volumes up year-over-year in the second quarter?

No I think outside of Europe the best way to characterize volume is once a market is converted to LIP, which in our case the pre-European markets would have all been converted. The only little bit of noise in there is Australia and Finland but once a market is converted, it's going to typically follow the secular trends of that market, which for North America would be declining, and therefore unless our market share changes, which we didn't say that anything happened in that regard, we're going to generally follow the overall market.

Okay that's helpful and just the last question, I think in the press release you talked about contractual pass throughs and your base paper business beginning to potentially benefit the results in the back half. Can you just remind us what part of your business does have the contractual pass through agreements and how you expect that will actually begin to benefit the results? Is there any incremental number or range that you can provide on how the pass throughs will begin to benefit the numbers in the back half?

Yes the way that works we do have a fairly significant percentage of our business that has mid-year price adjusters that would resulted in price increases because of inflation on July one. So a third quarter going forward benefit that would allow us to start to recapture some of the inflation we saw in input cost in the first part of the year. Then the net of those price increases in earnings is also going to be affected by what is the run rate of additional inflation as we go forward because we don't have another bite at the apple for price increases until January one of 2012.

Right now, as we've said this morning, our view on inflationary inputs is energy is likely to still be increasing year-over-year. Wood pulp is mixed, some markets down, some markets still having increases but flattish. And then not really related necessarily to inflation but the wild card being currency in terms of macroeconomic factors, but net, net we should be making progress, seeing some earnings improvement as a result of price increases July one.

Thanks very much for taking my questions.

Ann Gurkin, Davenport.

Congratulations on a nice quarter. I wanted to start with RTL, the benefit in Q2, is it partially a timing issue? Is that fair to say?

Well, I think it's clearly the comparative of the second quarter for 2010, which was a very poor quarter that, you know, low volume and so I think it was an easy quarter to beat. I think we have had a very strong first half of 2011. Again, we've good volume, a little bit better than planned but we benefited from very strong efficiencies and a stronger Euro to the dollar than previous year.

Looking into the second half of the year, like last year we are taking a limited amount of downtime over the summer on our smallest machine to accommodate for vacations. It's an efficient way of running the mill during that time of the year and then we foresee to have good capacity utilization for the balance of the year and for as long as the currency euro to the dollar doesn't shift significantly from what we are seeing right now, we should come below last year, at least in euro profit expressed in euro currency and but somewhat better than what we guided in February.

And then moving to LIP, I guess the ramp up costs were a little more than we're looking for. Is there anything in that number, any kind of timing or additional cost?

No honestly I mean we are completely on track with the ramp up of LIP in Europe, whether it's in the volume of demands, the volume of output, the efficiencies, I mean we have planned for a learning curve, which was impacted the first half results and what we are seeing right now is good progress on the learning curve. We are, as we stated, close of first month we have a profitable position in Poland and we are seeing significant increase in demand. We are adding capacity in the third quarter and will be entering fourth quarter steady run rate and continue to reaffirm our expectation of $50 million in pretax earnings, additional contribution coming from the LIP EU business.

Should we expect any additional start-up costs for LIP in the second half?

Well, we're not through the learning curve so we're not going to be at maximum efficiencies and so what you should expect is that I would not quantify your initial year start-up costs but you should expect strengthening in the profit margins coming from LIP getting, you know, obviously third quarter or the second quarter but continuing into the fourth quarter and maybe some into 2012, as we complete our learning curve.

And, Ann, to follow up on that, if we could look at the month of June as more indicative of going forward we had exactly what Frederic mentioned. We still have start-up expenses but despite start-expenses in the month of June, we generated a substantial profit so yes we're not yet at full efficiency but that doesn't mean we won't have positive earnings growth.

Okay that's great. It helps and then what do you using for the euro/dollar conversion for the balance of the year?

Same thing as we've done last couple of quarters, it should where it is right now but the key is to remember that we have a fairly substantial exposure in Brazil as well, so it's the dollar to the euro but it's also the dollar to the Real. The further point that's important going forward is the European LIP earnings growth is all euro based earnings growth so the euro exposure as a percent of our total does grow fairly substantially so that's going to be taking on even greater weight. But we don't have a view on which way currencies are going. We are looking at our earnings guidance based on where currencies are.

Fair enough and then congratulations on you China joint venture. Should we expect that to start adding to the business in the beginning of 2013 or first half? Can you give us any kind of run rate?

I would say at this stage to be cautious more in the latter part of 2013.

Latter part, okay that's all I have. Thank you.

[Charles Newland], Neuberger Berman.

I'm sorry I was on mute there. What does the EU production of LIP do to your tax rate going forward, especially in 2012?

Yes the way to model that, in two -- we're going to skip 2011. In 2011 we'll have effectively a zero tax rate coming out of Poland because of tax incentives that are present. In 2012 on a more normalized basis it's a 19% tax rate in Poland but then we bring back through a royalty payment for the LIP technology a portion of the Poland earnings to the U.S., which would be taxed at 36% or 37%, more the marginal tax rate for the U.S. So for every euro of pretax profits from European LIP the effective tax rate will be likely in the mid 20% range.

And then euro converted to dollars taxed at mid 20s would be the dollar EPS or dollar earnings level from European LIP. So incremental European LIP profits net, net for the Company will have a mid 20s effective tax rate for book purposes.

Okay thank you.

And at this time I am showing no further questions.

Thank you, Wes. Thank you very much for attending the call. We appreciate very much your interest in the Company. Let me leave you with a few final thoughts. Our strategy remains on track and we remain confident to deliver a third consecutive year of record earnings in 2011. On the strength of EU LIP expansion we felt our growth expected in the years ahead as LIP regulations advances to new markets and we commence RTL expansion in China.

Pete, Scott and I will be in our offices today and if you have any further questions please give us a call. Have a nice day.

And, ladies and gentlemen, that concludes the SWM second quarter 2011 earnings conference call. We appreciate your time. You may now disconnect.