Mativ Holdings Inc (MATV) 2012 Q2 法說會逐字稿

Welcome to SWM's second quarter 2012 earnings conference call. Hosting call today for SWM is Frederic Villoutreix, Chief Executive Officer. He is joined by Jeff Cook, Executive Vice President, Chief Financial Officer and Treasurer; and Scott Humphrey, Corporate Treasury Director.

Today's calling is being recorded and will be available for replay noon Eastern Daylight Time. The dial in number is 800-585-8367 and enter PIN number 99972652. At this time all participants have been placed in a listen-only mode, and the floor will be open for questions following the presentation. (Operator Instructions).

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

Thank you, Lori. Good morning. I'm Scott Humphrey, Corporate Treasury Director at SWM. Thank you for joining us to discuss SWM's second quarter 2012 earnings results. On today's call Frederic high level comments about our second quarter performance and priorities. Jeff will then take you through a detailed review of our financial results and guidance. 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 filing, including our Annual Report on Form 10-K. Certain financial measures discussed during this call exclude 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. Late yesterday we released our second quarter earnings, and I will talk about that in the next several slide. We also announced a two-for-one stock split, the first time in SWM's history. This split shows our confidence in the Company's long--term strength, and it is also demonstrates our commitment to increasing shareholder value.

Specifically, the stock split has several benefits. For instance, we expect an improvement in market liquidity, and our shares should become more accessible. Both of which position SWM as a more attractive investment to a larger shareholder base. Current shareholders will benefit directly thanks to the doubling of our dividend yield, which is made possible by maintaining the $0.15 per share quarterly dividend in combination with the split.

Now I will comment on our second quarter results as summarized on slide four. Improvements in second quarter earnings versus 2011 primarily reflect gains in our LIP paper business, driven by increases in [pouchable] LIP volume as well as LIP royalty income. RTL sales volumes were down 2% compared to a strong quarter of 2011 as well as timing of personal shipments, but increased 5% year-to-date compared to the first six months of 2011.

Our operational excellence program continues to deliver solid benefit, more than offsetting inflationary cost increases and slightly higher manufacturing expenses. Adjusted earnings-per-share from continuing operations finished the quarter at $1.64, a 36% increase over for 2011, reflecting SWM's focus on growing our value LIP and RTL franchises, as well as the impact of our share repurchase program. Last, our cash generation a was strong compared to the second quarter last year on stronger earnings and less use of working capital.

Moving to operational trends on slide five. Our second quarter results benefited from a full quarter of LIP sales in European and the recognition of $3.2 million in LIP royalty income, as well as continued strong RTL demand. EU LIP demand in the second quarter was better sequentially versus the third quarter 2012, as inventory levels at our customers have become more balanced. In fact, customer shipments picked up in June, and we entered the third quarter with solid momentum.

We expect EU LIP volumes to increase strongly in the second half of 2012, in line with our original expectations for full year customer commitments, and the direct share of the European market to be approximately 40%. We also reiterate our expectation of LIP licensing revenues exceeding $12 million in 2012. We continue to drive improved operational performance through our lean six sigma initiative, which more than offset negative impacts from inflationary cost increases.

On the downside, Paper segment volumes declined 9% for the second quarter 2011 due to reduction in Western world tobacco consumption, timing of customer orders, and elimination of unprofitable business in selected earlier. We addressed these volume declines via temporary machine shutdowns during the quarter, which negatively impacted [other absorption] rate.

Current demand for cost leads to better overall capacity utilization in the second half of each year. As always, we continue to closely monitor the balance of demand and supply and will take appropriate action as needed. Last we did experience negative currency volatility versus the second quarter of 2011. The weakening of the euro against the US dollar affected earnings unfavorably in the quarter.

Slide six summarizes our [three] business drivers for 2012. Our objectives and priorities remain clear, and we continue to focus on extracting growth and value from our higher value 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 an expected [fourth] consecutive year of earnings in 2012, fueled by a full year of EU LIP regulation and moderate growth in RTL.

Looking beyond 2012, we see potential for growth of our higher value products for two compelling reasons. First, with LIP regulations expected to advance to new markets, and second, as a result of projected increase in demand of reconstituted tobacco leaf as [tar limits] are implemented in China. I will now turn the call over to Jeff to discuss our financial results in more detail.

Thank you, Frederic. Moving to slide eight. Net sales adjusted for constant currency increased a strong 8.1% for the quarter on higher LIP volume. $13.4 million of the increase in sales was due to growth in our LIP business, and $3.2 million of it was due to royalty income. Currency translation provided an unfavorable variance of $24 million, due primarily to a weakening of the euro versus the US dollar.

Turning to slide nine, volume trends. Changes in unit volumes reflect general trends within the industry and timing of customer orders. On the positive side growth continued in LIP during the quarter from EU LIP implementation and resulting SWM share gain rising [15%] over the prior-year quarter. We expect strong growth in the second half, as customers increase their order levels to meet full year commitments.

Reconstituted Tobacco sales volume, although down 2% compared to the prior year due to timing of customer orders, were up 5% for the first half. We still expect moderate growth in RTL sales for total year 2012.

Overall Paper segment volumes declined 10%, including volumes from [CTM], our joint venture in China, versus the second quarter of 2011. This was due to reduction in Western world tobacco consumption, timing of customer orders, and elimination of unprofitable business in selected areas. Volumes at CTM, our Chinese joint venture, are off to a slower than expected start in 2012. However, customers remain committed to their annual forecasted volumes, and we should see an improvement during the second half.

Year-to-date operating profit, adjusted for $5.3 million of restructuring and impairment charges, increased $24.2 million or 41% from the first half of 2011 due to a $22.6 million benefit of favorable product mix combined with $7.1 million in royalty income. Lower wood pulp prices an other costs of sales offset higher non-manufacturing expenses, inflation and currency translation effects.

North American wood pulp list prices averaged $900 per metric ton for the second quarter, down from $1,025 per metric ton during the second quarter 2011, but up 3.4% versus the first quarter of 2012. However, pulp prices are now projected to decrease slowly, beginning in the third quarter.

Our adjusted operating margin for the first half rose to 20.9%, up 550 basis points from the first six months of 2011. Foreign currency translation impacts were net unfavorable to operating profit by $8 million during the first half of 2012, due mainly to impacts from the euro in relation to the US Dollar.

Slide 11 shows the strength of SWM's second quarter adjusted operating profit by business segment. The RTL segment declined slightly compared to the second quarter of 2011 due to sales volumes and currency translations. However, RTL remains ahead of 2011 for the first six months of 2012 thanks to higher volume. The Paper segment, as well as SWM in total, improved significantly on a year-over-year basis thanks to EU LIP implementation and LIP royalty income.

Our second quarter 2012 adjusted earnings-per-share, as shown on slide 12, increased 36% over the second quarter of 2011 but was down $0.14 sequentially versus the first quarter of 2012. The combination of currency translation and some machine downtime due to a lower level of orders contributed to the sequential decline in EPS. Our paper joint venture in China, CTM, has experienced a negative variance in earns versus 2011 due to both the timing of orders and gains booked in 2011 on the revaluation of US dollar loan thanks to [RMB] depreciation in the prior year.

The impact of our 2012 share repurchase program was $0.05 per share on second quarter's reported adjusted earnings-per-share. Through July 27, 2012, we have purchased approximately 677,000 shares in the 2012 share repurchase program aggregating, $45.9 million of the authorized $50 million.

Although this slide does not include restructuring and impairment expense, we did incur $5.3 million in this area during the quarter. A portion of these costs were contract breakage fees in support of our ongoing cost savings program. The remainder were noncash impairment charges related to the transfer of certain equipment from RTL Philippines to our Chinese RTL joint venture, CTS.

Moving to slide 13. Our adjusted earnings before interest and taxes improved by 22% or $7.4 million from the second quarter of 2011 due to the onset of EU LIP regulation in late 2011. Adjusted EBITDA from continuing operations totaled $50.5 million for the second quarter of 2012, which is up from $41.6 million in the second quarter of 2011. Our trailing 12 months of adjusted EBITDA is now $215 million.

Turning to slide 14. SWM's net debt increased by $23.2 million during the second quarter. The additional debt was used to cover a portion of the share repurchases and $16.4 million for equity injections into CTS, our Chinese RTL joint venture. The remainder was provided by cash from operations. Activity continues to increase related to CTS. Construction is ongoing, and we expect to begin commercial operations in 2014.

The $16.1 million increase in net debt year-to-date reflects the return of cash to shareholders and equity investment into CTS, offset partially by solid cash generation from operations. Total debt was 27.8% of capital, and SWM's net debt to adjusted EBITDA ratio remains low at 0.40 as of June 30. Net debt is expected to decline in the second half of 2012, as any remaining share repurchases and other cash requirements will be more than offset by continued strong generation of cash from operations.

Now moving to slide 15. For 2012 we expect cash usages to be considerably below 2011 levels. Capital spending was $14 million during the first half of 2012, well below the $42.1 million incurred during the first six months of 2011. The 2011 capital spending included $29 million towards construction of the RTL facility in the Philippines to a mothball state, and $4.5 million towards completion of the LIP printing facility in Poland.

For the full year of 2012 we expect capital spending of approximately $30 million, more in line with historical maintenance levels. We expect other cash usages, including funding the China RTL joint venture and the increased dividend payout of between $35 million and $45 million for the year.

Our return on invested capital in 2012, as shown on slide 16 increased to 22.2%, well above SWM's cost of capital and above prior year levels, primarily due to increased net income in 2012 compared to 2011. Our return on invested capital is expected to remain strong in 2012 due to the earnings gains from EU LIP on relatively stable levels of invested capital.

Slide 17 summarizes our financial guidance. Due to the negative impacts of the euro on our translation of earnings, we are lowering our 2012 adjusted diluted earnings-per-share guidance from $7.20 to $7.05. Our revised guidance assumes currency rates equivalent to what we experienced in the second quarter. This guidance also excludes the benefit from 2012 share repurchases. Based on share repurchases through July 27, 2012, we estimate the current full year benefit from repurchases to be approximately $0.22 per share.

The key risk of 2012 earnings continues to be volatile currency markets. If currency rates stay at the level seen during July, SWM will encounter an additional headwind of $0.12 to $0.15 in earnings-per-share from currency. That concludes our remarks. Lori, please open the line for questions.

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

Good morning.

Hey, Bill.

Just wanted to -- as you look out past the next couple quarters into 2013, kind of an outlook for both RTL? And then any update on kind of what you're hearing on LIP into new countries, or we still a quarter or two away from that?

Okay. So let me focus first on the remainder of the year. In terms of RTL, we continue to expect very good volumes, capacity utilization and as such, strong earnings from the RTL business segments in line with what we have seen year-to-date. And the key for us is to [host] incremental growth as we get into 2013 to rebound after a period of 2010, 2011 being more flattish in terms of volume. And I mean so far we have seen that [planting the] activity, and then obviously the major milestone for 2014 will be the startup of our joint venture in China with expected strong growth from this market in the years 2014, 2015, 2016.

For LIP we are forecasting a very strong second half of 2012, based on customer effective commitments [have] been renewed and the momentum that we see as we enter the third quarter. For 2013 and out, in terms of the global [adds to come] new territories, new countries adopting our LIP regulation, and at this stage, while there are activities at government levels or at the World Health Organization level, with a working dedicated to establishing a global standard for LIP regulation, there's no sound schedule established yet or communicated yet.

However, there is some preplanning work taking place and -- jointly with some of our key customers lead us to believe that, if not in 2013, in 2014 we should see the addition of new markets that will continue the growth [path] that we have seen over the last sell years.

I understand, and thanks for the color on that. Going back to the RTL front, is there enough activity, or if you're looking kind of virgin leaf prices over the next couple years, to actually restart or relook at the Philippines project, or is that still probably a ways offer? And then on the LIP front, have there been any countries in addition that are going this year or even next year? I know they're not as meaningful, but just other ones that are moving?

So on the RTL side I think the strength of our volume this year speaks for the focus that we have on developing new business, with an eye on Asia, excluding China. And as such I think we remain confident that we will restart the RTL Philippines in time.

Now, with this being said, our priority in terms of capacity addition is the Chinese market, and it is unlikely that we will restart the -- our investment in Southeast Asia prior to adding established position in China, or at least site to commercial sale products out of our Chinese joint venture.

For LIP, I mean, the two markets have adopted LIP regulation this is year, one in Switzerland, which is already in effect. The other one is South Africa, which will come the latter part of this year. We [are indeed] eventually [build node] South Africa, so there is clearly going to be a carryover effect into 2013, but both markets are relatively small in size.

And again I think there is an important event later this year in November, the World Health Organization has a seminar with working commissions reporting on progress in [November in] Korea, and that's probably where we could see a more [clarity] to the schedule for further adoption of LIP regulation.

Okay. And then just last one. Jeff, can you help me on the tax front? And was the higher tax rate this quarter always in your original guidance? And shouldn't we expect, especially as Polish operation is going kind of kick in, tax rate continue to kind of drift lower and lower?

Yes, the higher effective tax rate you saw this quarter was driven by some of the restructuring actions. The impairment on the RTL equipment being transferred; we didn't take a tax credit on that, so that boosted up our effective rate on our overall GAAP earnings-per-share. And then we did have a small additional valuation allowance on the Philippines operation. So that's why you saw that number remain high.

But the outlook we're giving you are excluding those restructuring and impairment activities, and also the tax valuation allowances. I would expect -- for the total year I would expect to see our effective tax rate probably around 35% or so. That's a total year, which includes the impact of what we have already seen in the first half. But, again, the things that swing that are some of these unusual impairment entries.

So as we move to 2013, getting back down to 30 is more realistic?

Yes, getting down to the low 30s is more realistic. And you're right, with Poland starting to be more profitable in a lower tax rate that will help us there.

Okay. Great. Thanks so much.

Your next question comes from the line of Ann Gurkin from Davenport.

Good morning.

Good morning, Ann.

I want to just start with -- follow-up on the comments, you were talking about -- Frederic, about LIP. Is that still on the agenda for the WHO meeting in November? Any changes to that.

No, there's no changes on the agenda.

Okay. Great. And then RTL demand is softer in Q2. Is that the timing effect, or was there a change in order patterns [submitted by any of your customers] for RTL for the year?

Pure timing effect. The lumpiness of the RTL business and the fact that one quarter from another you will see in terms of the timing of closing production orders some small swings, but really we -- the demand against our factories remains steady and relatively strong.

And then I guess any [this after thought], any price erosion for the LIP business as you look to the back half of 2013 or -- I'm sorry, 2012 or as you go into 2013?

No. I think as we said before, I mean we secure fixed-pricing agreements with RTL contracts in Europe. Multiyear supply agreement. There is always, outside of Europe, some contract renegotiations taking place, but nothing [consequence].

Okay. And then [you feel you have] generated aggregate amount of cash flow this year. Jeff, can you comment at all for the potential use of that cash flow?

No, we're looking forwards to the second half to good generation, and now with the stock buyback, very little left in the $50 million, so I think we will see good generation in the second half.

Any chance of a additional buy back?

We haven't even finished the current one yet, so got to get through that and then look at the overall picture again.

Fair enough. Thank you very much.

Okay. Thanks, Ann.

(Operator Instructions). Your next question comes from the line of Alex Ovshey of Goldman Sachs.

Morning guys.

Hey, Alan.

Thanks for all the color on the call and in the presentation. A couple of questions. On FX, I was surprised by the magnitude of the impact on the EBIT line. In the past you have also talked about the impact from changes in the Brazilian currency, andyou didn't really call that out in the second quarter. So maybe you can just talk to us about it any rule of thumbs we should be thinking about sensitivity to the euro and Brazil?

No, I mean, in the real we have hedging contracts in place going out several years there, so you won't see terrific variation plus or minus as the real changes and going indifferent directions, so the impact there of any change is muted because the large portion of that is hedged.

Got it. So on a go-forward basis the FX exposure is largely to the euro?

Yes, that's the primary one for us.

And is it largely translational? Is there any transactional exposure?

No, it's mostly transitional in the earnings. I mean, we do some hedging activities on certain transaction activities and balance sheet things, but mostly it's on the translation of earnings.

Got it. Helpful, Jeff. And then any update on litigation in the US post the ITC stuff wrapping up? And any change in the competitive landscape in the US? I saw in the Q there was a commentary on Europe around Glatz, I think, challenging some of the patents that you have been granted. If you have any incremental color you would like to add there, that would be helpful as well.

Well, I think on the US we have no new developments on the litigation side post the ITC ruling. And on the markets coverage, I think looking at our direct sales, [they] remain well oriented, strong. Looking at revenue from the license agreements in place, I think we continue to see extremely good coverage of the -- and extraction of value from these segments.

In Europe we have a handful of patent positions that were filed right [after our] patents [our RD patents got granted] over the last few years. We keep seeing new patents granted for us, which strengthens our patent portfolio for in this strategically import region, and we do expect that as those patents get granted to see some position activities. However, those activities -- [it is our position that's] really not progressed much. They're still in the brief paper exchanges mode, and so we have nothing of substance to comment at this stage.

Got it. Thank you, Frederic.

Thanks, Alex.

Your next question is from Ann Gurkin of Davenport.

Thank you for taking the follow-up. Just wondering if you could comment on what you have included for volume estimates for the US, globally and China now for 2012.

So the volume estimate in terms of the --

[The growth] volume, yes.

-- the growth. Yes. I think in the US, [obviously] in line with what's being reported by the major players, so we're talking about a -- let's say a 3% accretion rate, which is somewhat lower level than prior years. The growth in China, at least the first half, was somewhat of a flattish profile, which is quite unusual. I think some of that is the timing of some of the promotional activities and maybe some other production in the second half of 2011. The statistics, as you know, today showing -- forecasting a growth in the 3%, 3.5% range for China for 2012.

And on the outside the joint venture, CTM, as Jeff alluded to in his prepared remarks, we have seen a soft first half due to the timing of orders. However, we are entering the third quarter with stronger orders and renewed commitment from our customers [for] the full year demand. And so we continue to grow in China at a faster pace than the other markets, because we are positioned on the -- as number one to the supply on most of the major brand in China, which through the government program of concentration of cigarettes producers and brands, is playing to our advantage with stronger growth than the average market rate.

And then in Europe?

In Europe I think this is kind of a mixed -- well, as I look at the rest the world -- we're talking about US and China, and then the rest of the world. I mean, Western Europe [certainly there is attrition] rate -- consumption decline, and the switch to other tobacco products have been more pronounced this year than in prior years. The Eastern European market also is kind of cooling off as well, and the global [climate coming from key] markets in Asia and the Middle East, which are the ones that everybody else -- [other] companies and ourselves are concentrating their efforts on.

So we do have numbers of down 3% an 4%? Is that I reasonable range for the year?

For the [year]? Yes.

For the year. That's still in line with what you're modeling?

Yes.

Okay. Perfect. That helped. Thank you very much.

Thanks, Ann.

At this time there are into further questions from participants. Operator: Gentlemen, are there any close remarks?

Well, thank you, Lori, and thank you for everyone tending. Again, we remain confident in the outlook for the balance of the year. The volatility euro to the dollar lately has only add a little bit of headwind to our earnings. However, when I look at the operating plan, this plan for five years remain intact and with growth potential getting into 2013, 2014, which in my mind is going to continue to carry the earnings of SWM up.

And we certainly are excited with the stock, and the ability to include our dividend yield as a results of that action. So we look forward to talking to you all in the coming weeks, and wish you a good day.

Thank you for participating in today's SWM second quarter 2012 earnings conference call. You may now disconnect.