Mativ Holdings Inc (MATV) 2013 Q1 法說會逐字稿

Welcome to SWM's first quarter 2013 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 Mark Spears, Corporate Controller. Today's call is being recorded and will be available for replay beginning at noon Eastern Standard Time. The dial-in for the replay is 1-800-585-8367, and enter PIN number 37230552. 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. Spears. Sir, you may begin.

Thank you, Lori. Good morning. I am Mark Spears, Corporate Controller at SWM. Thank you for joining us today to discuss SWM's first quarter 2013 earnings results. On today's call, Frederic will share some high-level comments about our first 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 and impairment expenses and are, therefore, non-GAAP financial measures. I will now turn the call over to Frederic.

Thank you, Mark. And good morning, everyone. Late yesterday, we released our first quarter earnings, and we will discuss results in the next several slides. As shown on slide 4, we had solid first quarter earnings. As expected, our top line was level with the prior year, as a 10% increase in LIP volumes offset a decline in reconstituted tobacco sales.

As you may remember, the first quarter 2012 was an exceptionally strong quarter for RTL, and the first quarter 2013 was also impacted by the timing of certain shipments. Adjusted earnings per share from continuing operations of $1.01 came in slightly above our expectations, driven by the favorable impact of foreign currency exchange rates and lower non manufacturing expenses. Although foreign currency exchange rates remain a key variable, we may slightly exceed our total year 2013 earnings guidance of $3.70 if we can retain the benefits included in our first quarter results. Cash generation also remained strong in the first quarter, and we are now in a net cash position of 19.2 million as opposed to a net debt position of $62.2 million one year ago. This strong performance includes the impact of a fourfold increase in our quality dividend rates beginning with the third quarter 2012 dividend.

Looking ahead, we are confident of our overall 2013 business plan. We are realizing solid earnings improvements from our operational excellence program and the restructuring actions taken in the past year. And we continue to expect this would be an important element of our 2013 adjusted earnings per share growth over 2012. Foreign currency exchange rates remain a key variable for us, and we are seeing some headwinds from rising prices. In addition, first quarter sales weakness noted by some of our customers is a concern for future quarters, especially in western Europe. It did not appear to affect us in the first quarter. However, we are watching incoming order levels very closely.

Moving to operational trends on slide 5, LIP volumes increased by 10% over the prior year, as we were in a buildup mode during the first quarter of 2012. Nonetheless, first quarter volumes were very solid, and our market position remains strong. As I indicated previously, RTL volumes decreased by 9% from an unusually strong first quarter 2012. In addition, other timing was a factor, especially at our wrapper and binder mill in Ancram, New York. Construction activities at our plant in China are moving along very well with the expectation to reignite RTL volume growth beginning in 2014.

With respect to cost optimization, we have continually improved our track record of eliminating costs on the business, and the first quarter was no exception. Year over year, cost benefits from our various Lean Six Sigma efforts and restructuring actions provided approximately $5 million of cost improvements, especially in the paper segments. Our success in these efforts helped to offset a negative impact from higher pulp prices as well as some mix issues in our base paper business. We have worked hard to generate strong cost savings to offset inflationary and pricing pressures, and this remains our focus for the long run. Lastly, currency volatility favorably impacted our results, especially the weaker real in Brazil. Jeff will talk more about this later in the call.

As I discussed in our last earnings call during February, SWM is focused on a very clear growth strategy. We have continued to develop plans and actions around this strategy, and I will provide updates from time to time on key initiatives and efforts. Although our growth plans anticipate expansion into non tobacco areas, it is important to note that SWM remains committed to serving our tobacco customers with the same high level of quality and innovative products as we always have. As an example, key research and development efforts are underway on the next generation of LIP products, and we continue to improve upon our reconstituted tobacco products in support of customer needs for improved taste and additive free grades. These initiatives will help SWM to not only maintain, but grow its leading tobacco industry market position and continue generating the solid levels of financial performance that our shareholders have come to expect.

We are continuing to invest in Asia to capitalize on growth opportunities and regulatory trends requiring more sophisticated cigarettes in design and performance. The new RTL joint venture in China is well underway and will provide volume and earnings increases over the next several years. We continue to explore options for further growth in China and Asia as we want to be solidly positioned to serve the continued growth of cigarette consumption in China as well as the expected launch of LIP in the Asia region in future years.

Finally, we continue to step up our commercial and product development focus on non tobacco applications. We are actively expanding our market presence in electrical papers and composite laminates and are exploring new avenues to leverage our technologies in new filtration and medical applications. Our general strategy here is to leverage our expertise in high strength, low basis weight cost papers, containing engineered fibers and develop value adding solutions to highly specialized industries where we can really bring our R&D expertise and experience to bear. As I said in February, it remains our view that a diverse yet stable growth portfolio better positions SWM to weather market situations and improve in cost structure productivity.

While we remain confident with our 2013 and longer term business plans, we will achieve more consistent and higher growth with a more diverse set of product offerings and a larger customer base. Let me now turn it over to Jeff to discuss our financial results in more detail.

Thank you, Frederic. Moving to slide 8, first quarter net sales decreased slightly versus the prior year quarter. As Frederic indicated, RTL experienced an exceptionally strong level of revenue in the first quarter of 2012. However, the lower first quarter 2013 RTL volume was partially offset by higher LIP revenue. In addition, RTL had improved pricing levels.

Turning to slide 9, volume trends, first quarter 2013 reconstituted tobacco sales volumes were down 9% compared to the prior year period, due primarily to comparison with a very strong Q1 performance in 2012. Tobacco paper volumes, including CTM, our joint venture in China, were stable with the prior year quarter, with LIP up 10%. Overall SWM volumes including CTM, our paper joint venture in China, were down 3% from the same quarter in 2012, driven by the reconstituted tobacco volumes.

Slide 10, operating profit comparisons, first quarter adjusted operating profit was $0.6 million lower than the prior year quarter. The slight decrease was primarily due to the unfavorable impact of lower reconstituted tobacco sales, offset partially by improved global paper profitability including LIP. The impact of higher pulp prices and some product pricing and mix pressures were offset by lower non pulp material costs and non manufacturing expenses as well as favorable manufacturing costs driven by operational improvements. As expected, pulp costs are a headwind for us in 2013, with higher hardwood prices in the Americas and expected increase in software prices in Europe over the next few quarters.

As you'll see on slide 11, paper profits improved on higher volume, and LIP products had excellent manufacturing cost performance. Although royalty income was down from the first quarter of 2012, this was more than recovered through greater direct market share. Adjusted operating profit for the first quarter of 2013 was down from last year in reconstituted tobacco due to lower volume and timing of shipments, but helped by improved pricing. In addition, Q1 2012 was an exceptionally strong quarter for that segment.

Our first quarter 2013 adjusted earnings per share as shown on slide 12 was $1.01 per share, up $0.10 or 11% from the first quarter of 2012. The improvement in first quarter is primarily the result of lower non manufacturing expenses as well as favorable foreign currency exchange rate gains on several hedging transactions and a $0.6 million tax benefit in France driven by the quarter-end drop in the euro compared with the end of 2012. This latter benefit could reverse if the euro sustains the strengthening seen in the second quarter.

Turning to slide 13, SWM's net debt decreased by $24 million during the first quarter of 2013 and decreased $81.4 million since the end of the first quarter of 2012. These improvements are despite the impact of a fourfold increase in our dividend rate since the third quarter of last year. Total debt was 23.6% of capital at the end of the quarter. Now moving to slide 14, capital spending was $5.6 million in the first quarter of 2012 compared to $7.8 million in the first quarter of 2013. For 2013, we expect capital spending to be between $30 million and $35 million, slightly higher than 2012 levels but still well below 2011 spending. We expect 2013 equity investments for CTS to be less than half the amount we invested during 2012, and we did not purchase any stock under the $50 million authorization established in the fourth quarter of 2012.

Return on invested capital for the first quarter as shown on slide 15 was 21.2%, in line with our 2012 results, and well above our cost of capital, primarily due to strong earnings and continued prudent use of capital. Return on invested capital is expected to remain strong in 2013 due to higher earnings and relatively stable levels of invested capital. That concludes our remarks. Lori, please open the line for questions.

(Operator Instructions)

Bill Chappell, SunTrust.

First, just trying to understand what you are seeing, I think we've talked in the past that you expected your trends this year with no new LIP countries to match some of the industry volumes worldwide. Are you seeing a further deceleration of volumes, or how should we gauge that as we look to the next couple quarters?

Good morning, Bill. Let me address your question. I think you are right to say that the plan for 2013 is based on no expansion of LIP regulation. We have built in our guidance the normal attrition in terms of cigarette consumption in the western markets that already under LIP regulation. And as we signal in our prepared remarks, the only area of concern that came out in the first quarter is the weaker sale of cigarettes in the EU in the first quarter than, I would say what the cigarette companies would have planned themselves. To qualify it, the cigarette companies in Europe have reported a 10% decline in cigarette consumption in the first quarter where the annualized rate last year was more 6%.

But this was due to economic reasons and other factors, and right now on our end, we have very strong sales at LIP during the quarter. So we just need to monitor that. So our plans, our guidance is built around some volume attrition into the cigarette declines, but also us continuing to gain market share and improve our cost position on the paper segment to deliver the earnings that we've built in the guidance. And we are off to a good start.

Maybe, Frederic, you could kind of walk through what you are seeing on RTL, just in terms of do you expect the overall category to grow this year? Are you rethinking anymore about the Philippines facility, or what you are going to do with the European facility, and how you see demand with leaf prices kind of moving, how that should play out this year.

We built our plan for 2013 assuming flat volumes for RTL, and that was coming after a very strong 2012 exercise, and our focus is to build the factory in China, China Tobacco-Schweitzer or CTS. As it is clearly the number one growth opportunity that we have, starting in '14 and for at least the next three years, in a significant way. And again, it's a 30,000 ton investment. We have an 80,000 ton footprint today. So it's in itself almost a 40% growth rate that is built in over the next three years-plus.

As it relates to the general environment, our sales were somewhat weak in the first quarter. However, it's not unusual for RTL, and we had some shipments that were shifted to the very beginning of the second quarter, so I am not concerned at all about us at least delivering on our view of the flat volume for '14 -- '13, sorry. And for the RTL Philippine investment, our priority in terms of execution remains China, and we will revisit the opportunity to restart the investment in the Philippines once the China investment is activated. In the meantime, we continue to make progress developing new demand for RTL from the Asia ex China region, so we remain on track with our plans to take advantage of the opportunities that exist and will in our view further strengthen for usage of RTL in Asia.

Great. Last question. Jeff, maybe, tax rate for the full year, what you are now expecting.

I would say that we'll be down probably around -- if you use 31%, we did have some things that pulled us down in the first quarter, unusually low hit, but I would say using 31% is probably a fair number for the overall for the year.

Perfect. Thanks so much.

(Operator Instructions)

Ann Gurkin, Davenport.

Good morning. I wanted to start with, to get some additional detail on some comments, Frederic, you made in your presentation. I think you said RTL Q1 timing shipments had an impact. Can you quantify that?

It's hard to quantify because that happens every quarter. Whether it's favorable or unfavorable, it's a fairly lumpy business, large orders, two customers, and it's a matter of when you close and ship a campaign, a production campaign. What I can say is our second quarter will be stronger than the first quarter. But more importantly, our view is that we are on track to deliver on our guidance for RTL, which is at least a flat volume on the full-year basis.

Okay, and the same question relates to LIP. You said there was some buildup in the first quarter?

The buildup was, in fact, the comparison in the first quarter 2012. If you remember, the industry in Europe got prepared for an implementation at the end of 2011, and there was some destocking after a very large inventory build at our customer that took place during the first quarter of 2012. So in comparison, the first quarter of '13 is very strong, and in absolute numbers, it is strong is and we have gained market share points in the quarter, '13 -- first quarter '13. But the comparison to '12 was, let's say, nothing to say with finality because the first quarter of '12 was a somewhat weak quarter for the 2012 exercise.

And then if we can turn to share repurchasing price that you did not buy any stock under your $50 million authorization. Can you comment on your expectation to address or buy under that program this year during '13?

Yes, it's -- as we said when we came out with that plan originally, it was an opportunistic plan to have out there, but the important thing to remember is we balance that action with our overall cash needs in the business. We've got -- we're looking at several potential opportunities for investments in the core business, particularly opportunities in Asia, and trying to figure what's going to happen with LIP and when some of the next markets are going to go, and what our needs will be for that as well. So it's a constant rebalancing of the needs of the cash.

Now, the other thing we also said is that much of the cash we returned would be in the form of dividends, and certainly we're holding true to that. So buy backs are, in effect, an opportunistic plan to have out there to be balanced with all these other demands. And we can't underestimate the fact that there could be substantial needs for investing in RTL and LIP over the next two or three years, depending upon how things materialize, particularly in Asia. So those are the variables we're constantly weighing here and trying to factor into our quarterly buyback plans.

Fair enough. Then I have to ask about e-cigarettes. There's growing focus on the rapid growth of the e-cigarette segment. Do you anticipate that impacting your business over the next several years, or how do you view the rapid growth of e-cigarettes in the US?

Clearly, and especially if we look at the US markets, there is rapid growth, and -- of these cigarettes. There is -- and obviously the secular decline in consumption of conventional cigarettes. There are tobacco products additives as you know that are competing with the e-cigarettes to attract smokers, conventional smokers. There's a lot of uncertainty right now. As you know, FDA is reviewing the e-cigarettes, and no decision has been made or communication has been made from FDA. Those products are not taxed today, and things may change.

So for us, as we stated during the last call, we are certainly looking at whether this segment, product segment, especially as it relates to the cartridge refills and nicotine extraction, could that be an avenue for us to expand our product offering. Nothing -- no new development on this front, but we're certainly monitoring the growth of e-cigarettes, and our regulators will, both in the US but also in Europe, will look at these cigarettes as an alternative to tobacco products.

Great. Thank you. Congratulations on your quarter.

(Operator Instructions)

At this time there are no further questions. I will now return the call to Management for any additional or closing remarks.

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

Thank you for participating in SWM's first-quarter 2013 earnings conference call. You may now disconnect.