Mativ Holdings Inc (MATV) 2011 Q4 法說會逐字稿

Welcome to SWM's Fourth Quarter 2011 Earnings Conference Call. Hosting the call today from SWM is Frederic Villoutreix, Chief Executive Officer. He is joined by Mark Spears Interim Chief Financial Officer and Scott Humphrey, Corporate Treasury Director. Today's call is being recorded and will be available for replay beginning at noon Eastern Standard Time. The dial-in numbers are 800 585-8367 or 404 537-3406 and the pin number is 43058172.

At this time all participants have been placed in a listen-only mode and the floor will be opened 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, Jackie. Good morning. I'm Scott Humphrey, Corporate Treasury Director at SWM. Thank you for joining us to discuss SWM's fourth quarter 2011 earnings results.

Frederic will discuss the key factors impacting our business. He will then provide additional detail related to our fourth 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 excluded restructuring expenses and valuation allowances 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 fourth quarter and full-year 2011 performance and cover our initial 2012 outlook and priorities. I will then take you through a more detailed review of our financial results and guidance.

Slide four summarizes our financial results for the quarter. Improvement in fourth quarter revenue and earnings measurements finally reflect gains in our paper business driven by an increasing EU LIP volume and profitability as well as LIP royalty income, which includes a settlement of past sales from Delfort as a result of the agreement announced in October.

RTL sales volumes increased sequentially during the fourth quarter and brought full-year sales volume to essentially the same level as prior year.

Fourth quarter earnings also benefitted from several unusual items including approximately $6.9 million in net favorable tax benefits.

Continued inflationary cost increases, higher mill operating costs including some seasonal machine down time and increased non-manufacturing expenses, primarily from LIP legal actions, partially offset the benefit of increased LIP sales.

Adjusted earnings per share from continuing operations improved to $2.66, an all time quality record from SWM, reflecting improved business performance as well as a 16% effective tax rate during the fourth quarter due in part to tax incentives associated with LIP investments in Poland.

Cash generation increased compared to the fourth quarter last year, primarily due to the higher net income generation but remain below 2010 on a full-year basis. The lower cash generation during 2011 was largely due to a planned increase in working capital, primarily reflecting new working capital needs to support operations in Poland.

Moving to operational trends on slide five, our fourth quarter reserves benefitted from the further ramp up of LIP sales in Europe and the recognition of additional LIP royalty income, while RTL demand remained at a high level throughout the quarter.

General macroeconomics in terms of inflationary cost increases and currency volatility had a negative impact on our fourth quarter results but at a reduced rate compared to earlier in 2011. Primarily our [stock] costs have now swung to a net favorable year-over-year comparison.

We also continue to drive improved operational performance while Lean Six Sigma initiatives albeit fourth quarter overall manufacturing cost performance was negatively impacted by some residual amount of EU LIP start up costs and some seasonal machine down time in December.

Non-manufacturing costs remain high during the quarter, primarily due to LIP related legal actions.

In total we are very pleased with our fourth quarter and full-year performances and are poised to build on the positive momentum in our paper business to achieve further top line and bottom line growth in 2012.

Turning to slide six, we have made further significant progress on several of our key growth initiatives. European LIP regulation went into effect in November. We continue to estimate our share of the European market to be approximately 40% and reiterate our expectation of generating more than $50 million in incremental actual pretax earnings from the EU LIP opportunity of constant exchange rates for approximately EUR38 million.

Activity continues to increase related to our Greenfield RTL facility in Yunnan Province, China called CTS. Construction has commenced and we began funding our equity share in December 2011 with a $6 million contribution.

Along with our existing Chinese paper joint venture, CTM, which delivered earnings of $4.7 million in 2011 versus earnings of $3.2 million in 2010, we are well on our way to establishing a significant market position in premium applications in the world's largest and fastest growing tobacco markets. We expect CTS to begin our commercial operations in early 2014.

Slide seven summarizes our key business drivers for 2012. Our objectives and priorities remain clear and we continue to focus on extracting growth and value from our LIP and RTL products, improving our global capabilities and driving operational excellence in all that we do. We are confident in our ability to execute against these objectives and deliver fourth consecutive year of record earnings in 2012 fueled by a full year of EU LIP regulation.

We are very pleased with the revenue growth and strength of earnings delivered by our China paper joint venture. CTM is now operating at near capacity and the focus is now shifting to improve its cost control and introduce new premium grades to continue to fuel the growth and further establish a leadership position on top cigarette brands.

RTL volume was down less than 1% in 2011 and we project volumes to remain even in 2012 in spite of the still volatile tobacco leaf markets.

Looking beyond 2012, we see potential further growth of our higher value products for two compelling reasons, first with LIP regulation advancing to new markets and secondly as a result on increased demand of reconstituted tobacco leaf as (inaudible) limits are implanted, implemented in China.

Quarterly results with you on guidance, I will now review our reserves for the quarter and update our financial guidance.

Moving to slide nine, net sales increased 19% in the quarter compared to prior year fourth quarter thanks to $21.3 million benefit from changes in volume price and mix and $15.6 million in royalty revenue. This was partially offset by $1.3 million in unfavorable currency impacts related to the euro.

Excluding currency impacts, net sales increased a strong 20% for the quarter on higher LIP cigarette paper unit volume.

The fourth quarter marked the third consecutive quarter where we showed steady growth on the strength of LIP EU revenues.

Moving to volume trends, out of the eight quarters presented changes in unit volume reflect general trends within the industry. LIP growth of 60% during the quarter from EU LIP implementation and resulting share gain was offset by cannibalization of conventional cigarette paper requirements and excluding China decreased market needs. Only China is showing consistent volume growth among major world markets and although mitigated total SWM tobacco paper sales declined to a small 1% for the quarter including volume from CTM, our Chinese paper joint venture.

Record set tobacco sales volume increased during the fourth quarter compared to third quarter and ended even with prior year fourth quarter. As a result, full-year reconstituted tobacco sales volume declined less than 1% compared to 2010.

We are pleased with the full-year performance of these segments given the world's oil conditions within the leaf tobacco sector.

Moving to slide 11, fourth quarter adjusted operating increase, the profit increased by $26.6 million due to $16.5 million from higher sales volume, selling prices and favorable product mix combined with $15.6 million in royalty income.

These positives were partially offset by higher non-manufacturing expenses, inflation and a residual amount of European LIP start up expenses.

North American NBSK wood pulp prices averaged $920 per metric ton for the fourth quarter, down from $967 per metric ton during the fourth quarter the fourth quarter 2010 and decreased 7.3% from the third quarter of 2011.

Pulp prices are expected to remain flat in the first half of 2012 before rising later in the year as we see tightening of supply due to some pulp mills stoppages.

Foreign currency translation impacts were net unfavorable by $0.4 million during the fourth quarter due to impacts from the Brazilian Real and the Polish Zloty in relation to the US dollar. Highly volatile currency relationships worldwide likely will continue to cause a mixed impact on SWM earnings during the first quarter of 2012.

Slide 12 shows the strength of SWM's fourth quarter operating profit, both the paper and RTL segments as well as SWM in total improved on both a sequential basis and year-over-year. The increase in the global paper segments is attributable to both royalty income and an increase in EU LIP volume. Several year-over-year increases in SWM operating profit are expected in 2012.

Moving to slide 13, similar to operating profit trends SWM's fourth quarter EPS results improved sequentially and year-over-year.

Fourth quarter EPS included royalty payments from [Delfort] corresponding to the EU ramp up in 2011 as well as a settlement for past sales. And during the fourth quarter we recorded deferred tax benefits of $6.9 million approximately $0.41 per share.

Adjusted EBITDA from continuing operations totaled $66 million for the fourth quarter of 2011, which like operating profit and EPS is improved due to net income generation driven by EU LIP direct sales and royalties.

SWM net debt increased by $34 million during the fourth quarter. The increase in net debt versus year end 2010 reflects cash uses but include $105 million in share repurchases and a $21 million planned increase in working capital requirements to support our EU LIP operations.

Total debt was 23.5% of capital and SWM's net debt to adjusted EBITDA ratio remains low at 0.38 as of December 31. Net debt is expected to decline in 2012 despite CapEx requirements in investment in our RTL JV in China as a result of continued high generation of cash from operations.

For 2012 we expect cash uses to be considerably below 2011 levels with capital spending of approximately $35 million, which will be more in line with historical maintenance levels and other cash uses including funding the Chinese RTL joint venture of about $45 million.

Return on invested capital in 2011 increased to 19.9% above SWM's cost of capital and above prior year levels primarily due to increased net income in 2011 compared to 2010. ROIC is expected to further grow in 2012 due to the earnings gains on EU LIP on stable levels of invested capital.

We are [ensuring] our full-year earnings guidance to be at least $7.20 per share excluding restructuring and assuming constant currency. We reiterate our underlying expectations for business performance during 2012 including further increase in earnings from European LIP sales growth.

Included in the $7.20 guidance it is our expectation to realize royalty revenue in 2012 associated with our existing LIP license agreements of at least $12 million. We continue to gather market share information for our competitors in the EU and we'll update our expected royalty income as we progress through 2012.

The key reasons for 2012 earnings are volatile currency markets and further legal expenses related to LIP patent actions. Given macroeconomic instability, the impact of currency is difficult to predict so we have provided guidance on a constant currency basis. If the average exchange rate for full 2012 remains at current spot rates currency translation would decrease expected full-year earnings per share by approximately 5%.

As you may have seen yesterday, Judge Gildea rendered his initial decision in the ITC actions filed by SWM in December 2010. The initial decision found that our claims were not infringed by the German competitor, Glatz. It clearly was not the outcome we were expecting and we responded in a press release with some key statements and comments, which I will be ready to address during our QA session.

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

(Operator Instructions). Your first question comes from the line of Bill Chappell with SunTrust.

Just you talked some of it a little bit but just kind of understanding capital allocation in terms of your cash flow, I mean it seems like now for the next few years you've had almost annuity of cash coming through and hopefully more cash than you know what to do with. Will we hear from the Board or a dividend, a share repurchase step up, something else near term to if you really feel like there the cash has better use there than earning kind of 0.1%.

Hi, Bill, this is Scott. We do presently have a new share repurchase authorization from the Board for up to $50 million in share repurchases. Any additional share repurchases or changes to dividend levels will be determined in balance with other potential strategic cash uses. In the meantime any excess cash generation will be used to reduce debt.

And I think that it is fair to say that we will remain opportunistic as we progress throughout the year in terms of share buyback as demonstrated with the actions we took last year and I think we also will progress on our thinking in terms of where there is value to split the stock and modify the dividend yield.

Okay and then in terms of cash, just to make sure that I understand, I mean shouldn't you in 2012 also be getting something from the joint venture in terms of the property that was in the Philippines that's being sold, the equipment being sold to the joint venture?

Currently that -- yes this is our expectation that we will transfer equipment that are currently on our books to the CTS joint venture and get some cash as a result.

Now, at the other end we mentioned the equity injection that will be required. The net, net of this should be a positive for SWM so that will be an upside to our cash flow generation.

Okay and then just trying to understand I mean in a good way RTL exceed -- I mean it missed your expectations in terms of we started this year assuming it was going to be almost at 50 -- or started '11 thinking it was going to be a $0.50 hit to earnings, down 10% volumes and it really out performed. What gives you confidence or that it remains flat in 2012 and why shouldn't actually we see it start to tick back up as we move closer to 2013 and virgin leaf prices seem to be ticking back up as well?

Yes I think maybe to refine this let's go back a year ago. I mean the year ago we got a very short notice from two of our major customers about reducing their projected purchases of RTL, which led us to making some adjustments with our business strategy for that segment and being cautious in February of 2011 as to the outlook of last year. Now we -- obviously our business has out performed that projection in a big way.

I think it shows a resilience of our business model that in a down cycle, '11 and '12, our down cycle in terms of the imbalance between demand and supply of virgin tobacco, that we are able to maintain our ground at a very high ground level because both in terms of revenue, volume and earnings 2011 RTL segment is the best year ever for SWM and we project to maintain at about that level in 2012, which for me is obviously that's stage one.

Stage two is, as you pointed, we need to come back, go back on a growth mode. There are a lot of actions that are ongoing and we certainly expect with China coming on board by the end of 2013, early 2014 to be a significant step up in revenue and sales volume levels and obviously this doesn't happen overnight so this is what we are working on and we certainly expect to see growth in 2013 and maybe some in 2012. It's too early to call.

Okay and then just one last one, on Glatz I mean you've competed with Glatz in Europe over the past year and from my understanding they, all the competitors in Europe, have kind of assumed your patents weren't valid and they've just kind of gone to market yet you still kind of come up with the share you did. I mean why wouldn't -- why haven't other players like Glatz taken a bigger share? I mean, if they have a cheaper, better product and it was just patents, how come they haven't taken such a bigger share in Europe?

Because the LIP technology is a lot more than patents. It's about (inaudible) the right product that performs, that gives the technical performance that the cigarette producers need in terms of making at low cost high efficiencies cigarettes and also the consumer acceptance factor is important. And I think you're touching on some important facts, which are right now as we enter 2012 we reiterate our views with approximately 40% of share for they're excelling which is a significant increase from the past where we had about 30% share of the EU market prior to LIP regulation coming along.

And also that with existing license agreements in place we see right now at least another 40% of the EU market that is covered by both license agreements, so obviously we do not have a license agreement with Glatz. Otherwise we will have announced it and so it clearly shows that competitors like Glatz today in an industry that did not look at integral property as a major criteria as far as EU is concerned, that does not get a lot of share, which to some degree speaks for the value of our product proposition, the value proposition of our product and also of the other players covered under license agreements.

Perfect, thanks for the color.

Alex Ovshey, Goldman Sachs.

Couple questions, Frederic, on the non manufacturing expense I am assuming most of that was legal in the fourth quarter and it seems like there was a meaningful step up in that legal expense relative to where it was running for the first three quarters. Can you just comment on that and whether you have any incremental outlook for what that legal expense number could look like for you in 2012?

Yes I think that you're right. Our legal expenses in the fourth quarter were in that higher level than we had seen even in the third quarter. That is in line with also the amount of activities [partially] related to the ITC case that took place in the fourth quarter, the trial, the preparations for these hearings. That's very labor intensive in terms of legal services and also drafting and the drafting and legal sharing the global license agreement with [Delft]. All of that took place in the fourth quarter so, this being said, we certainly expect this intensity of legal expenses to decrease in 2012 starting with the first quarter of the year.

Okay and is that a decrease relative to the fourth quarter run rate or relative to the full year 2011 expense number?

I would say, as per the quarter, definitely to the run rate of the fourth quarter; for the full year 2012 the latter, which to a decrease, projected decrease at this stage, from the total amount of legal expenses we incurred in 2011.

Okay helpful, would you be able to comment on what the implied revenue base is that the $12 million royalty figure covers in 2012?

I would say this is what I just mentioned. You know, our view is approximately 40%, 40% plus of the EU market covered by license agreements so that's '12. So if we see the 40% becomes 50% or more, expect this number to climb.

Okay understood and last question, can you comment on what the profitability in EU LIP was in the fourth quarter relative to what you expect the full run rate to be, which is north of $50 million or about $12 million to $13 million of operating earnings per quarter?

Yes different ways to look at it so one in terms of manufacturing efficiencies we had minimum amount of [selling] expenses. They were more in the beginning of the beginning of the fourth quarter so I think we still have opportunities to improve efficiencies but we are kind of getting well ahead in the learning curve if you want.

I think when you look at the fourth quarter you obviously have to be careful that there is a major impact of royalty income, which is much more than just one quarter and so some adjustment needs to be made there. But I think it's fair to say that if we were to adjust the fourth quarter for a normal level of royalty income on an ongoing basis, the profitability of the paper segment will be somewhat in line with what we expect in '12 and with probably a little bit more upside due to one, the deflation projected at least on wood pulp prices compared to previous year and the gains in efficiencies in manufacturing those LIP products.

Okay thanks, Frederic.

(Operator Instructions). Ann Gurkin, Davenport.

I wonder if you could help me with what we should use for a tax rate for '12, given the business in Poland now and the Brazilian tax credit adjustment.

Ann, this is Mark Spears. I'll take a shot at that question. We're projecting an ongoing normalized tax rate in 2012 in the range of 30%. I guess that takes into account that we have recorded as a deferred tax asset the credits that we will be utilizing in Poland in 2012. So that's the use of those credits then is part of our expense in 2012.

Okay and then you all at the start of your presentation talked about the potential for additional LIP market. Can you give me an update on how things are progressing, any markets close to requiring the use of LIP on cigarettes?

Well, it's still rumors and activities in various countries. I will mention South Korea and Japan in Asia, the CIS countries, Russia, Turkey in the broad Europe and I think for us there's enough activity to think that new markets will come along whether in 2013 or 2014 but there is also an important event later this year with the World [Health] Organization and the FCTC convention, which will meet and discuss the working agenda for new regulations around tobacco and LIP regulation is one of the five priorities of FCTC so I would expect we'll have greater clarity as to which countries and the timing of adoption around that meeting, which is scheduled to take place in November of 2012.

Okay and then in your earnings outlook for 2012 do you incorporate your share repurchase program? How shall we think about that?

The one last year?

The $50 million that's been approved by the Board.

The 50, no we have not because again it's opportunistic and we'll provide dates as we go through the year but no there is no for this $50 million authorization none of that has been built in the $7.20 guidance.

Great and then what are you assuming for worldwide cigarette volume in 2012 and US cigarette volume?

Well, I think we are assuming for US, the US market, a continuation of experience 2011, which was around a 3.5% decrease in consumption of cigarettes. I think Europe is in the same ballpark, 3%, 3% to 4%, and probably more tax increase activities in some of the European countries to come in 2012. And worldwide it's still going to be a small, slight increase and it's all coming from China. I mean China continues to be healthy, show healthy growth in the range of 4% and I don't see a reason for that to change.

Okay and then plant down time in Q4, was that in line with your target?

Can you repeat the question, sorry?

The plant down time you took in the fourth quarter, was that in line with your expectations?

Yes I think this -- again, this is induced by actions taken by our customers to themselves and I think they want to maximize shipments but also optimize their working capital as they close the year so, as you know, it's certainly cigarette factories are taking down time in December and I think this year was probably maybe slightly higher than what we are used to is what we have seen from key customers but all in all I think it's part of their -- the seasonality of a business and it was something that we had in line when we discussed the outlook for the year, year-end, last November.

Great. That's great. Congratulations on a great year. Thank you.

At this time we have no further questions. I'll turn the floor back over to management for any closing remarks.

Thank you, Jackie, and thank you, everyone, for your attendance and the support and confidence you put in SWM and look forward to talking to you and meeting you in the foreseeable future. Bye, bye.

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