Mativ Holdings Inc (MATV) 2012 Q3 法說會逐字稿

Welcome to SWM's Third Quarter 2012 Earnings Conference Call. Hosting the call today from 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 call is being recorded and will be available for replay beginning at noon Eastern Standard Time. The dial in number is 800 585-8367 and for international 404 537-3406 and pin number 44684942. 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, Lorie. Good morning. I'm Scott Humphrey, Corporate Treasury Director at SWM. Thank you for joining us to discuss SWM's third quarter 2012 earnings results.

On today's call, Frederic will share some high-level comments about our third quarter performance and priorities. Jeff will then take you through a more 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 filings, 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 third quarter earnings and I will talk about that in the next several slides.

As shown on slide four, we had solid third quarter earnings and performance, which underscored our sustained business momentum. As expected, we experienced growth in EU LIP sales versus levels seen in the first half of the year and we expect this to continue during the remainder of 2012 in line with our original projections for full-year customer commitments.

RTL sales volumes were also up compared to the third quarter 2011 partially due to timing of some customer shipments, which moved from second quarter to third quarter, as well as continued growth in the business.

Adjusted earnings per share from continuing operations, which is now is like the two for one stock split executed during the quarter, finished the quarter at $0.95, a 23% increase over third quarter 2011 reflecting SWM's focus on growing our higher value LIP and RTL franchises as well as the impact of our share repurchase programs.

Finally, our cash generation was very strong compared to the third quarter last year on stronger earnings. We also completed the $50 million share repurchase program that was launched earlier in the year and Jeff will provide more details on this.

During the past two years we have completed stock repurchase programs aggregating $155 million and, as a result of the two for one stock split, we have effectively doubled our dividend payouts.

We continually evaluate the most judicious use of our free cash flow maintaining an appropriate balance between continued investments in key growth areas and returning cash to our shareholders. In this regard, we will attempt to provide more insight behind our continually evolving plans during future calls.

Moving to operational trends on slide five, RTL volumes increased by 19% over the prior year quarter reflecting timing of selected customer orders as well as continued year-over-year volume growth. In that regard, we now expect full-year 2012 RTL volumes to increase in the mid-single digits over 2011 levels.

Paper segment volumes including CTM, our Chinese joint venture, increased by 2% over the prior year quarter, a reversal of a decline we saw in the second quarter 2012.

As expected, EU LIP demand in the third quarter was better sequentially versus the second quarter of 2012 and we expect fourth quarter volume to continue strengthening as our customers complete their full-year commitments.

CTM volumes, as expected, are recovering from a weak start of the year. We also saw an increase in non-tobacco papers during the quarter versus the prior year quarter.

Operational performance and productivity improvements continue to be a key focus for us led by our lean six sigma initiatives, which continue to more than offset negative impacts on inflationary cost increases.

Currency volatility negatively impacted us versus the third quarter 2011 as weakening of the euro and Polish zloty against the US dollar continue to negatively impact earnings in the quarter.

Slide six summarizes our key business objectives. Our objectives and priorities remain clear. Our continued focus on execution is vital to our success and this is why we remain on track to achieve our total year earnings guidance despite the weaker euro during the third quarter.

Our guidance adjusted for the stock split and accretion from our fully executed $50 million repurchase program remains at $3.63 adjusted earnings per share, a non-GAAP metric, and is dependent on the euro staying at current levels for the remainder of the fourth quarter of 2012.

In connection with the potential for future growth of our high value products, we are looking forward to the World Health Organization Conference of parties meeting in Korea during November. We expect recommendations from this convention of tobacco control to favor expansion of LIP standards worldwide and we may gain insights as to the timing of potential new markets for our LIP franchise.

In addition, during the third quarter SWM obtained a license from the Chinese Government to import our wrapper and binder products for smaller cigars into the Chinese market. Although it will take time to develop customer demand for this product, it is an exciting expansion into a potentially large new market.

As we continue to focus on extracting growth and prosperity from our higher value products, we also continue to evaluate other potential growth opportunities. 2012 is the first full year where we have reaped the benefits of both the US and EU LIP market conversions. These achievements combined with major cost structure improvements implemented during the past several years in our core paper business are expected to result in the fourth consecutive year of record earnings for our Company.

In this regard, we expect to maintain our focus on investing in key growth opportunities to sustain a path of continuous earnings improvements for our shareholders.

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 6.4% for the quarter in both higher LIP and RTL volumes. This is our sixth consecutive quarter of year-over-year sales growth.

Now turning to slide nine, reconstituted tobacco sales volumes were up 19% compared to the prior year, partially due to timing issues which moved sales from the second quarter to the third quarter. RTL volumes are now up 9% for the first nine months of the year.

Overall paper segment volumes including volumes from CTM, our joint venture in China, increased by 2% versus the third quarter of 2011. Volumes at CTM increased 23% versus the second quarter of 2012, which reflects the expected second half improvement in volume we discussed last quarter.

Total SWM volumes including China were up over 8% in the quarter versus the prior year quarter.

On slide 10, year-to-date operating profit increased $35.6 million, or 38% from the first nine months of 2011, due to a $29.4 million benefit of favorable volume and product mix combined with $8.4 million in royalty income.

The lack of start-up costs for EU LIP, as well as other cost of sales improvements, offset higher non-manufacturing expenses, inflation and currency translation effects. Year-to-date pulp costs have been essentially the same as the first three quarters of 2011 as lower soft wood press prices have been offset by higher hardwood prices. Pulp prices are projected to remain fairly stable over the final months of 2012.

Our adjusted operating margin for the first nine months of 2012 rose to 21.4%, up 580 basis points from the first nine months of 2011.

Slide 11 shows the strength of SWM's third quarter adjusted operating profit by business segment. Despite the impact of a weaker euro and Polish zloty, overall operating profit was up 34% over the prior year quarter. Excluding the impact of prior period royalty payments received in the fourth quarter of 2011, this is a record high quarter for SWM operating profits.

Significant operating profit improvements were noted in both segments of our business this quarter with RTL up 18% and paper up 38%. These strong results were driven by higher volume and increased LIP royalty income.

Our third quarter 2012 adjusted earnings per share, as shown on slide 12, increased 19% over the third quarter of 2011 and was also up $0.13 sequentially from the second quarter of 2012.

We completed our $50 million share buyback authorization during the third quarter. In total, we purchased approximately 1,480,000 shares split adjusted at an average price of $33.78 a share. The impact of our 2012 share repurchase program was $0.04 per share on third quarter results bringing the total year-to-date benefit to $0.08.

Moving to slide 13, despite the unfavorable impacts from currency, our adjusted EBIT improved by 37%, or $12.7 million, from the third quarter of 2011 due to the onset of EU LIP regulation in late 2011, increased RTL volume and effective margin optimization programs.

Adjusted EBITDA from continuing operations totaled $56.5 million for the third quarter of 2012, which is up from $44.4 million in the third quarter of 2011. Our trailing 12 months of adjusted EBITDA is now $227 million.

Turning to slide 14, SWM net debt decreased by $37 million during the third quarter of 2012 and is down $20.9 million from the end of 2011 despite $50 million of share repurchases and equity investments into CTS, our joint venture in China.

We expect net debt to continue to decline in the fourth quarter as cash requirements including dividend payments will be more than offset by strong generation of cash from operations. Total debt was 25.5% of capital and SWM's net debt to adjusted EBITDA ratio remains low at 0.21 as of September 30th, 2012.

Now moving to slide 15, for 2012 we reiterate our expectation for cash usages to be considerably below 2000 levels. Capital spending was $20.4 million during the nine months of 2012, well below the $51.9 million incurred during the first nine months of 2011. The 2011 capital spending included $30.8 million toward construction of the RTL facility in the Philippines to a mothball state and $9.2 million toward completion of the LIP printing facility in Poland.

For the full year of 2012 we expect capital spending of approximately $25 million to $30 million. We continue to expect other uses of cash including funding to China RTL joint venture and the increased dividend payout of between $40 million and $45 million.

Return on invested capital in 2012, as shown on slide 16, increased to 23.6%, well above SWM's cost of capital and above prior-year levels, primarily due to increased net income in 2012 compared to 2011. ROIC is expected to remain strong in 2012 due to the earnings gains from EU LIP on relatively stable levels of invested capital.

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

(Operator Instructions). Our first question comes from the line of Ann Gurkin of Davenport.

Good morning. Congratulations on your quarter. Want to start with the nice cash build we saw and if you could comment on additional potential uses of cash, are there acquisition opportunities out there and what would be criteria for acquisitions, if you could just help me with that?

Sure, well I think it's, as you know, our focus has been on extracting growth and value from our value-adding products like LIP and RTL and I think the primary focus of the Company is to continue to do just that.

We have a healthy portfolio of high-value added products with good future potential and the priority in terms of use of cash is going to be to maximize their performance, so RTL, LIP, China being let's say the flagship initiatives.

Now on the other hand the reality is that demand for conventional tobacco papers in Western markets continues to decline, which ultimately will put pressure on the capacity utilization of our existing production assets in both regions.

So over the past few years we have been exploring ways to apply our core technologies to markets outside of the tobacco industry and we have now dedicated teams in place pursuing several avenues to stimulate organic growth in the field of engineered thin papers and/or reconstitution of non-tobacco fibers, at the same time if we felt there was an opportunity to acquire a business that complemented these new product areas that we are exploring or possibly expanding to new opportunities in an adjacent market, we certainly would give it serious consideration but that has not been the primary driver so far and I would say there is nothing really material to discuss at this point.

And what about restarting a share repurchase program?

This is an option obviously that we have considered and acted upon over the past two years and remains certainly a vehicle of use of cash strategic for us and achieving what considers important to balance use of our cash flows between returning cash to shareholders and reinvesting in our business, so it's one of several avenues and I would say at this stage we have no announcement to make and it's certainly something that we know we will want to clarify in future calls.

Great, in terms of declining conventional cigarette volumes and softness, particularly in cigarette sales in Europe, how should we think about RTL volume for '13?

As you rightfully pointed, there has probably been more softness in cigarette consumption in Europe as it relates, for example, to North America than historically. I think for us we, because of the LIP events, we have been able to in fact gain share and certainly pull some good volume numbers. It's not absolute growth, at least good resilience of our business on the paper side.

On Recon as to your question, I mean 2012 is starting out to be a great year for us with very solid volume growth. We are still working with our customers in terms of their actual forecasts for 2013, so it's too early for me to really give you with great precision an outlook for '13 but everything looks so far that 2013 will be another solid year for RTL.

We are making progress on investment in China and therefore also that means we are building a pipeline of new demand on the Chinese market, which we are serving currently out of our French facility and with a view that, as we start this facility in China in the first half of 2014 that will create capacity availability out of France to continue to grow our business outside of China.

Great, and then in the Q you talk about actions to address the imbalance of supply and demand or capacity. Can you give us any more detail? Is that something we should expect an announcement about over the next year?

Well, I think it's something that I have been doing for I would say at least as far as I've been associated with SWM so since 2006. You know, we're constantly looking at how to optimize our manufacturing footprint and also we balance our capacity to demand and demand is growing in Asia. It's declining at least on the -- in terms of the secular trends in the Western markets. I think -- so we are constantly doing that.

The adjustments are smaller sizes than we have made in the past but we remain vigilant in terms of optimizing the use of our capacity and also looking at some imbalance in supply in some regions that put a lot of pressure on pricing. I'm talking here about conventional paper products and how -- what makes best sense for us and that's something we'll continue to do as we move forward as part of the game of being in the cigarette paper industry.

And then finally congratulations on obtaining your license to import wrappers and cigars paper in China. Is that something that should benefit results in 2013?

Not in a material way. I think this, the small cigar segment in China is very small at the moment but looking at the demographics, looking also at the leading styles, we believe there is a great potential and we have been qualifying some of our products with key customers without a license going through just research and development qualification process and so they think they really see that as an avenue but nothing that necessarily will materially affect the earnings of the Corporation in '13 but definitely over the next three to five years. Wrapper and binder has historically been a very successful and very high value product for us and we expect to expand it to China, which in itself is quite exciting.

That's great; thank you very much.

Alex Ovshey, Goldman Sachs. Alex, your line is open; please state your question. There is no response from that line. (Operator Instructions). Bill Chappell of SunTrust.

Just I think historically, or at least the past two, three years, you had kind of given more guidance for the future year on this call and so and I understand there are a lot of moving parts; but I guess on RTL and then also on just the core paper business -- I mean I thought the belief or the goal internally in the Company was even if with the assumption that volumes worldwide were flat to down, you could at least maintain the profit level just as you found efficiencies. Is that a fair way to kind of look at 2013, that at least we can have flat to slightly up profit levels on the current business?

Well, Bill, I can tell you as a corporation not looking at it that way because at least it's not even the bare minimum of what is acceptable. But I think, to your point, I mean the kind of growth through expansion of the LIP markets that we have seen in the last three, four years is going to slow down or is slowing down now. I am, again, I pointed to this conference that is coming in a few weeks where the working group around tobacco reg limitations is getting together and there is a specific agenda as it relates to LIP and, as we have guided over the past year or two, this could be a triggering event for some countries to communicate around adoption of LIP and, even if this adoption date is effective in '14, it could be effect on 2013 sales in terms of getting ready and inventory build.

So probably there's no big nugget of growth on the LIP that is confirmed for 2013 but we are still going through the learning curve in terms of efficiencies, gaining some traction. We are working very hard to expand marginally our market share, both in North America and Europe. We have South Africa that came along during the course of this year, smaller territories that are kind of neighboring EU but are adopting voluntarily those same regulations, so there is incremental growth and clearly in terms of our earnings we continue to expect to generate earning gains year-on-year.

Now definitely at this stage I cannot speak with clarity as to whether they will be in the same level of year-on-year gains that we have seen the past two to three years but the -- we're not looking at 2013 as it being a down year. We still have a lot of momentum in both on the commercial side and in industrial and running operational excellence program to continue to drive our earnings up.

Okay and then just -- I mean I guess, as I looked at 2013, any way to quantify -- I've forgotten kind of what the startup expenses were, both for LIP in Europe as well as kind of the legal costs, which I'd like to think are slowly going away?

I mean certainly the legal costs have gotten lower since we've gotten through some of the activity with the ITC so -- but the questions will there be other things that come up in 2013? We just don't know at this point. So we're literally in the process right now of developing our budgets and our plans for 2013 so we'll look to provide some more color of that in future calls like we have in the past but it's just really too soon at this point to give anything specific there.

Okay and then, Freddy, just one last one on just kind of as we go into the World Health Organization, I mean how should we be looking at that? I mean what in terms of announcements coming out there and what that actually means, will we see -- Russia says we're on board and that immediately means that within a 12 to 18 month period things should go live or how quickly can we gage what that really means?

Honestly I don't know for sure what the outcome of this event will be. I think clearly what we see based on some of the preliminary work papers there is going to be a big push to standardize the -- what LIP compliance means, so in terms of standards of compliance and so a large number of countries will likely adopt or support the idea that the standards for LIP compliance that are in place in North America and Europe will become kind of global standards. Now whether individual countries will be beyond that just also proactively announce a date for them to comply with LIP regulation is unknown.

Now clearly there is a number of countries, we have mentioned them in the past, that continue to work on the idea of adopting LIP regulation in their jurisdictions. Whether they will take the opportunity of the highlights being placed on this World Health Organization Conference of parties to make announcements during both that week or in the latter post conference we don't know.

My view is that clearly in 2014 and '15 we should see an expansion of the LIP markets based on the amount of activity that we see. We don't know which country will make announcements and we don't know if these adoption dates will be such where they may possibly impact 2013. That's why we certainly we expect to have much greater clarity when we get to the February earnings call and likely that's when we provide the next update.

Great. Thanks so much.

(Operator Instructions). Alex Ovshey, Goldman Sachs.

Can you hear me? Excellent, apologies for last time. A couple of questions; first, any incremental changes in the competitive landscape for LIP in either the US and Europe to talk to on any update of existing litigation here in the US.

Okay in terms of major changes to the competitive landscape on the LIP front, North America and Europe, I would say the answer is no. I think the -- our results year-to-date speak for the fact that we continue to hold a very solid share with the looking also at the stream of royalty income. I mean our view is that the combination of what we sell directly and what we sell through license agreements constitute the majority of addressable markets and nothing that we can say that this will be about to change.

Now that in itself also ties to your second question, is we have decided not to appeal the decision of the ITC, the International Trade Commission in the US, based on the fact that today we really don't have any -- we don't see Glatz having made or making inroads on the US market and we see ourselves having a very large and retaining a very large share of the North American market, things that we have in fact done since inception of that market. In fact, I would say over the last year or two we have gained share in North America as both litigations were progressing.

Okay, Frederic, well that's good to hear. And then in Europe, what is your current market share and LIP then just longer term, I mean as you get a better feel for who also is in that market right now competing with you outside of yourself and [Delphoi]? What do you see as your long-term share potentially in Europe LIP?

Yes I think now the dust is starting to settle in terms of the effect of the inventory build and then some of the end deals that took place. Clearly we are tracking along our projections, which were to serve an estimated 40%, 40% plus of the EU market. We are there, difficult to keep more precision than 40% plus. And in terms of what we see from the royalty incomes and combining with our own share, we are definitely leading north of 80% of the addressable market in the EU served either directly or through license agreements.

Got it. That's helpful. And just two last questions and I'll turn it over. If you look at just the CTM paper volume relative to the entire paper volume that you have globally, can you give us a sense of what percentage of the total volume right now is in China on this additional [paid] percent?

Yes I think we could say we -- it is between 15% and 20% of our capacity and production if you want for our paper products is in China. Now we are still selling to China even tobacco papers from Europe but from an installed capacity and production output point of view it's on its way to 20%.

Okay, Frederic, and just last question on the balance sheet. It's in great shape but longer term what do you guys believe the efficient leverage ratios are for the Company?

Well, I mean, you know, our -- as we've always said, our position was we wanted to pay down the debt with the cash that's being generated balanced out against what we're returning to shareholders through the buyback programs and down. As Frederic indicated, we'll -- we've continued to look in a balanced, the appropriate balance, in terms of future uses of cash flow along those same lines but we'll work to provide some additional insight on that in future calls for next year.

Okay thanks very much, Jeff and Frederic.

(Operator Instructions). At this time, there are no further questions. I will now return the call to management for any closing remarks.

Thank you, Lorie. Thank you very much for attending the call. We certainly appreciate your interest in the Company. Jeff, Scott and I will be in our offices today and if you have any follow-up questions, please give us a call. Have a nice day. Thank you.

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