Mativ Holdings Inc (MATV) 2013 Q2 法說會逐字稿

Welcome to SWM's Second 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 Checkanow, Director of Investor Relations.

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 16707638.

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. If you'd like to ask a question at that time please press star one on your touchtone phone. (Operator Instructions).

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

Thank you Laurie. Good morning. I am Mark Checkanow, Director of Investor Relations at SWM. Thank you for joining us to discuss SWM's second quarter 2013 earnings results. On today's call Frederic will share some high-level comments about our second quarter performance and priorities. Jeff will then take you through a more detailed review of our financial results. We will then take your questions.

Before we begin I would like to remind that the comments included in today's conference call included 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's 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. Reconciliation of these measures to the closest GAAP measures are included in the appendix.

I'll now turn the call over to Frederic.

Thank you, Mark, and good morning, everyone. Late yesterday we released our second quarter earnings and this morning we are pleased to present our results, our near-term outlook and update you on our long-term initiatives and opportunities.

As shown on slide four, we had solid second quarter earnings. Revenue grew 2% as we experienced sales growth in both our paper and reconstituted tobacco segments. Within the paper segment, LIP volumes grew 4% despite challenging tobacco industry conditions evident from the earnings announcement from some of our customers.

Within the RT segments, we saw volumes decline 2% but positive mix changes in the second quarter last year yearly revenue growth. While RT volumes decreased in the second quarter, the decline was much less pronounced than the reserves reported in the first quarter.

We are very pleased with our adjusted earnings per share from [potting] operations of $0.95 in the quarter bringing us to $1.96 for the first half of the year.

Cash generation also remained strong in the second quarter. We have a net cash position of $48.2 million as opposed to a net debt position of $4.8 million at the end of 2012.

Looking ahead, we remain excited about the prospects of our long-term growth initiatives while still closely monitoring our customer's volume trends as we all navigate a challenging tobacco environment.

SWM's tobacco paper volume, including our Chinese paper joint venture, grew by 3% in the second quarter. This was accomplished in an environment where mid single-digit customer cigarette sales volume declines are becoming [calmer] and is a testament to our strong customer relationships, value-added products and ability to gain share.

We also continue to reap the benefits of our operational excellence program, which provides support for our 2013 financial goals. As Jeff will discuss later, our year-to-date adjusted EPS performance is striking slightly above our plan albeit in large part of some non-operating items.

We are now comfortable raising our 2013 guidance for adjusted EPS from continuing operations to a currency neutral $3.75 from $3.70. This outlook does reflect softer performance in the second half of this year relative to the first half. As smoking attrition rates remain high, RT volume is expected to remain soft and top costs are elevated.

Moving to operational trends on slide five, I said before LIP volumes increased by 4% over the prior year. We do not believe there were any unusual channel inventory circumstances. Rather this growth demonstrates our valuable proposition to the cigarette manufacturers.

Over the long term our tobacco paper volumes may conform to cigarette smoking attrition rates but we continue to pursue increased share and position ourselves to offset these challenges. We think these efforts are evident in our year-to-date results.

Our continued focus on M&A eliminating costs from operations again yielded strong results in the second quarter. Year-over-year cost benefits from our various lean six sigma efforts and restructuring I expected to deliver a targeted $20 million to $25 million of annual savings. These achievements are critical to meeting our financial goals as we offset the negative impacts from higher pulp prices and other inflationary increases, as well as general pricing pressure and some mix issues in our non-LIP paper product portfolio.

Although industry sources expect some of the recent pulp price increases to reverse, we continue to see elevated prices in the markets and these costs will likely prove to be higher in the next few quarters versus year-ago periods.

Our operational excellence program provides current upsides to these challenges, as well as sets the foundation for long-term margin protection. As I indicated previously, RT volumes decreased by 2%. While this decline is an improvement from the first quarter decline, it was below our expectations. We continue to monitor this trend closely and work with our customers to meet their needs. However, we now expect RT volumes for the year to be lower than 2012 in response to higher cigarette smoking attrition, particularly in Europe.

While it is much too early to project 2014 volume levels for RT, we look forward to increasing our volume in China with a 2014 opening of our Chinese RTL joint venture, China Tobacco Schweitzer. We believe this will bring an increase in profitability beginning in 2015 after we saw higher start-up costs during 2014.

I will now provide an update on several initiatives that support our growth strategy. First, we remain dedicated serving our core tobacco customers at high level with both existing products and the development of innovative improvements.

On the LIP front we are rigorously pursuing next generation products with two primary areas of focus, cost reduction and minimizing taste impact. Leading the industry on these attributes should underpin our long-term success within the LIP space.

Within the RT segments, we continue to collaborate with our customers to advance flavor improvement and reduce harmful attributes. These projects are long-term in nature but as we continuously deliver on these commitments, we expect to secure our position in this important area.

In China we are moving closer to the 2014 opening of our RTL joint venture. We have forged solid relationships in this large and growing tobacco area, which will be key to unlocking long-term value.

Over the long term, two key potential developments could drive sizable profit growth for (inaudible) in China, the adoption of LIP standards and the opening of the tobacco marketplace. Our relationships with the governments and the leading cigarette manufacturers as well as our operating experience in China puts SWM on solid footing to be a valuable partner to existing international customers as well as our Chinese partners.

Regarding new LIP geographies, there's been one new regulatory development, which some of you may have seen. A vote in Russia is expected by the end of the year on LIP standards. I note this is not a vote on if and or when to adopt regulation but rather the product standards will be part of any future regulation. This is a key milestone in the process that we hope will ultimately add an LIP regulations being adopted in Russia and several other countries in the CIS.

It is too early though to make any timely predictions or provide financial parameters of a potential impact though we want to highlight that this region is a large consumer of tobacco and could prove to be a substantial revenue and earnings driver for us over the next several years.

We're also actively engaging our customers and developing plans for potential adoptions in other countries, such as Brazil and Japan.

On the diversification efforts, particularly M&A, we are dedicating resources to exploring adjacent spaces. Adjacencies can take many forms, such as products, technology and markets, etcetera. But rest assured our criteria is strict regarding retail investment. We ultimately answer to our shareholders and expect to make strategic decisions to grow and diversify without sacrificing the strong financial performance to which we have become accustomed.

Let me now turn it over to Jeff to discuss our financial results in more detail.

Thank you, Frederic. Moving to slide eight, second quarter net sales increased about 2% versus the prior year quarter. Paper segment volume and revenue both grew. RT segment volumes declined but mix changes resulted in 3% revenue growth in that segment. There was minimal impact from currency translation on the year-over-year comparison.

Turning to slide nine, tobacco paper volumes including the CTM, our joint venture in China, were up 3% with LIP volumes up 4%. Overall SWM volumes, including CTM, were up 4% from the same quarter in 2012. Non-tobacco paper volume was strong, especially shipments of wrapping materials for drinking straws.

Second quarter 2013 reconstituted tobacco volumes were down 2% compared to the prior year period. RT segment volume is tracking slightly below our expectations due to the higher than anticipated cigarette smoking attrition rates and, as Frederic indicated, we now expect 2013 RT volume to be somewhat lower than 2012.

As you can see on the slide -- on the chart on slide 10, year-over-year operating profit was essentially flat for the second quarter at nearly $43 million. While we did experience volume increases across our paper business, the decline in RT segment volume and mixed issues in our non-LIP paper products drove a slightly negative impact on profitability.

There are sizable differences in pricing and profitability of our various paper products and during the quarter we saw significant volume growth in some of our lower margin products. This contributed to the volume pricing mix profit impact shown on the chart. These mix issues were offset by improvements in cost of sales supported by the increased volume and again demonstrated in our ability to preserve margin through operational excellence.

As you will see on slide 11, paper segment profits grew on higher volume and LIP products and excellent manufacturing cost performance. The operating profit margin for this segment increased from 18.4% to 19.2%. We continue to see a year-over-year decline in royalty revenue, although not as pronounced as in the first quarter of 2013. We feel that this data point as well as our paper segment volume represents suggests that we are currently gaining share.

Adjusted operating profit for the second quarter of 2013 was down from last year in the reconstituted tobacco segment due to lower volume, although we had some favorable mix in the second quarter driving revenue growth of 3%.

Our second quarter of 2013 adjusted earnings per share, as shown on slide 12, was $0.95, up $0.07 or 8% from the second quarter of 2012. We benefitted from lower net interest expense, transactional foreign exchange gains and a slightly lower effective tax rate.

To date we are tracking ahead of our $3.70 guidance for adjusted EPS from continuing operations largely due to some non-operating items, such as foreign currency and tax benefits much of which is difficult to forecast.

As we discussed on the first quarter call, it was not reasonable to annualize the period's EPS and we believe that remains true for year-to-date results. However, we are comfortable with increase in our total year guidance to $3.75. Overall the tobacco industry faces some headwinds and we believe our guidance reflects our strong year-to-date financial performance as well as a prudently conservative stance going forward.

Cigarette smoking attrition rates were a key consideration in forming our guidance, as well as higher pulp cost and continued weakness in RT segment volumes. This guidance does not contemplate any potential stock buybacks and assumes foreign currency exchange rates remain at recent levels.

As we have discussed, the timing of new LIP regulation adoptions is unknown and without the benefit of any such regulations during 2014 our volume and revenue next year will be influenced largely by the attrition rates experienced in the mature North American and European regions.

2014 will also be impacted by higher one-time start-up costs of our Chinese RTL joint venture, although it's too early to quantify the amount and timing of these costs. We expect to see profits from this joint venture starting in 2015.

Turning to slide 13, SWM net debt has decreased by $53 million since the end of 2012, as we now sit with a $48 million net cash position. This cash accumulation includes the impact of our dividend increases from earlier this year.

Total debt was 23.7% of capital. Our cash levels have risen to $212.7 million. We remain committed to returning at least one-third of our free cash flow to shareholders as evidenced by the four-fold dividend increase in the past year. We expect this return to be largely in the form of dividends as share repurchases will be used only on an opportunistic basis.

In addition, they will be balanced with other strategic demands of the business. We do expect to invest as much as $200 million in the next three or four years in support of LIP expansion around the globe, completion of the RTL mill at our China joint venture and activities aimed at securing our longer-term position in the large and growing Asia region.

Now moving to slide 14, capital spending was $9.2 million year-to-date in 2013 versus $14 million last year. Although this run rate is below our revised 2013 CapEx guidance of between $25 million and $30 million, we still expect to finish the year in that range.

Our previous 2013 guidance for CapEx was $30 million to $35 million. We currently have a number of capital projects that we expect to execute in the second half of this year. We expect 2013 equity investments for CTS to be less than half of the amount we invested during 2012.

We did not purchase any stock under the $50 million authorization established in the fourth quarter of 2012. Despite ample capacity to repurchase stock, our buyback program is intended to be opportunistic. As I indicated previously, we will balance our uses of cash between buybacks and dividends versus growth projects, both organic and acquisition related.

Our strategy is not to accumulate excess cash and we believe we have demonstrated a strong track record of buying back stock opportunistically and increasing our dividend.

Return on invested capital for the trailing 12 months ending in the second quarter, as shown on slide 15, was 22.2%, well above our cost of capital. We continue to drive this metric as we believe it is the best measure to align management with our shareholders.

As you may know, ROIC is a key component of our executive compensation program. ROIC is expected to remain strong in 2013 due to stronger earnings and relatively stable levels of invested capital.

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

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

Just looking out in 2014, you highlighted several potential headwinds, specifically on the volume side and then on the cost side but as you think about the opportunity to continue to take more cost out of the business this year, you're tracking really well there. I mean as you think about '14, what is the runway to continue to take cost out of the business and do you think that would be enough to offset some of the other headwinds that you guys have talked to where you could potentially keep the earnings run rate flat to up a little bit even if you don't see LIP conversions play out next year?

Yes let me address your question, at least on the business side, and Jeff may want to add comments from his perspective as well.

Clearly we had (inaudible) on a company wide program lean six sigma three years ago and we are still gaining momentum so I see it's tough work but it's certainly we have the capability to continue to lower our cost base through operational excellence initiatives getting into 2014.

You mentioned the headwinds. We should not forget we also have opportunities in terms of introducing new products, continuing to gain market share and potentially the effect of new LIP markets opening up adoption in '15 that could drive some additional revenue and earnings in the tail end of 2014, just to name a few.

Okay that's helpful detail there, Frederic, and then on the market share front, can you just update us where you see your current market share position in Europe and the runway there to potential take incremental share over the next 12 months?

Yes I mean that obviously is our year-to-date results. You know, support the fact that we are gaining market share in Europe. I mean our customers are reporting consensus is around a 9% attrition rate in smoking year-to-date in Europe and we are posting some growth, 3%, 4% growth in our LIP. Now again, we have to be cautious here. We are achieving goals through the value proposition that we offer to our customers and this could change but right now we feel good that we have increased marginally our share in Europe from what it was last year.

And in terms of the outlook for next year, I mean obviously there's a lot of uncertainty within the industry as to whether attrition rates will recover, will improve in the second half of this year or next year. A lot of that has to do with the economic situation in Europe, tax measures that governments may or may not take and also effective are some of the measures to counter, at least a trade, in this -- in the region tend to be.

But clearly we anticipate that attrition rates will remain probably slightly higher than historical levels, which puts more pressure on us to lower cost and through new product introduction or commercial initiatives continue to increase our market share in the region to stay ahead of where we are today.

Thank you, Frederic, and last one on capital allocation, the free cash generation has been really solid. Stock is up a lot this year. to the extent that the stock continues to work and may not necessarily be such a great opportunity to be buying it back and acquisitions doesn't necessarily present itself by the end of the year, what is the appetite for potential special division in order to make sure that the cash flow doesn't just build up on the balance sheet and isn't utilized effectively?

Well I mean we're always looking at what would be potentially, you know, an opportunity to any future adjustments and dividends. I mean we do want to stick with the returning at least one third and there's always the chance that we could make a change there but again with the opportunities we're looking at in terms of growth of the business, both organic and inorganic, we want to retain the dry powder there and the opportunity to do some things so I think what we've been doing in the past from a dividend standpoint and continuing to improve the yield, we'll try to stick with that kind of moving forward.

Got it; thanks, guys.

Ann Gurkin, Davenport.

I just wanted to start with like customer orders for both paper and RTL. Are you seeing a change in the second half? Are customers changing their expected orders for the second half of '13 or even going into '14 at this point?

Not really, I mean I think what we have said in our prepared remarks clearly we have seen softening of the demand for RTL products, which clearly we see as an adjustment of inventory levels at our customers to reflect more of the ongoing demand for cigarettes. I think there has been an improvement in the second quarter or the first quarter in terms of the market conditions in Europe.

I believe our customers, as is stated in their earnings release, are cautiously optimistic that this improvement will at least continue and may improve, may make cover, you know, open up the situation in Europe. But again, this is a lot of that is driven by the economic situation in Europe and the fact that they are alternative tobacco products to cigarette smoking but today our less taxed in Europe, which certainly creates a headwind in terms for our customers in terms of pushing their sales of cigarettes.

So RTL volume for the year now you think down low single-digits for you? Is that what you're indicating?

Yes I mean I think you can see our run rate year-to-date. You know we are down from what was an exceptional year last year. I think we are still in terms of run rate probably be the second best year ever for French RTL facility so it's certainly not a bad terrible situation but it's certainly a start to the growth that we have seen in the past few years and the current demand is one thing.

I think it's important to mention and, as you probably know, Ann, in Europe is going through some revisions to their tobacco product directives, which is kind of a body of laws that are regulating the tobacco industry, both directly as to date from 2001 and it's up for revision expected to be finalized next year and I think that is creating a lot of pause for our customers. They want to see what will it be adopted, what will not be adopted among the many propositions and its certainly slowing down their rates of innovation introducing new cigarette designs, which is an important factor for RTL growth.

And obviously on the paper side, we are able to more than mitigate the soft market conditions whether that can continue over the next 18 months remains to be seen. Certainly it's hard work and it's our goal but the reality is that the market is shrinking in Europe at the moment.

And with RTL volumes down, is there any concern about capacity utilization for the RTL business? Is that softer than expected now?

No I mean the market, the capacity utilization is -- remains very high and obviously it's putting some burden on our other end, absorption cost. We continue to invest heavily in research and our development because we believe it's essential to the mid term outlook of our RTL franchise and, as reflected in the slight erosion of our profit margins for the RT segment, you know, volume is a negative factor for sure but the efficiencies are good and we have plans to continue to improve our productivities and improve our cost position on RTL as well.

Great. Switching to the China RTL joint venture, I thought that was going to start adding to profit in '14 so it looks like it's getting pushed out to '15 now. Can you comment on what's changed? I know you all in the press release highlighted increased startup cost but is there anything else in that amalgam?

Yes I don't -- I think there's all (inaudible) for the past 18 months has been to start up RTL in 2014. What we said is that there are 12 months of operation. The near would be expected to be breakeven. It happens that we see the startup to take place around the second quarter of next year and so therefore we see startup expenses in fact in 2014 but getting into the first quarter of '15 obviously with a profit being contributed from China Tobacco Schweitzer.

Yes the startup cost, Ann, there's nothing unusual about. I mean it's typical when you open a mill it's just in the timing of when we think they'll open versus when the profits start to grow. It's just you'll see the profitable overall come in 2015 but in the startup costs are typical, just an accounting thing where you have to take the hits for them when you first start up.

That's great and then not asking specific details but are there M&A opportunities that you're still reviewing out there for potential use of your cash? Can you comment at all on kind of what that pipeline looks like, timing, any kind of detail you could give us there?

Yes I mean we certainly don't have anything to discuss specifically at this point. As we have said in the previous quarter calls, we are investing, both in the group being organic growth opportunities, leveraging paper assets and our knowledge in reconstituting fiber materials. And we continue to invest heavily in this area and, as we also stated that we are looking in our very selectively organic opportunities but really nothing that we expect to see coming in the immediate future.

And for us it's a matter of thinking long-term in terms of the growth profile as far as the BUM and we believe and I thinks it's confirmed with their recent outlook on tobacco that it is the right thing to do mid to long term to look at diversifying our product portfolio with non-tobacco applications added to the very strong core that we have built over the past several years.

And then, Jeff, can I just get the pulp cost that you're including for the second half?

Yes we -- I mean we haven't specified the particular number, as you can see in the first half we were able to offset some of the higher cost with some purchasing activities and also some currency benefits from locations where we buy it but I think as we start to consume more of the inventory we bought in the first half, you'll start to see more pressure and some headwinds on that in the second half, not -- and not a hugely material number but certainly higher cost than we've seen in the past.

Great, thank you all very much.

(Operator Instructions). Larry Stavitsk, Sidoti & Company.

I just had a couple questions on the -- you know, you spoke about the uncertainty with the attrition rates in Europe and North America and also the LIP adoption and some of the countries, you know, Brazil, Russia and China. Would you have any idea of when you would get a better grasp of these, of when you'd get a better outlook on these concepts? Would it be towards the end of '13? Would it be '14? Is there anything you could expound upon on that?

Okay so let's first address the question on the market conditions in North America and Europe. I think it's fair to say that North America attrition rates around 4% today are the normal outlook so there's really nothing unexpected there. In Europe really as this has been the -- somewhat of a surprise to many stakeholders of the tobacco industry to see the drop 10% in the first quarter, 8% in the second quarter from an historical level that was more 4% to 6% in recent years.

Yes.

Again, whether that is going to continue, improve we can't comment. I mean we'll take the news as it comes but we are certainly planning for considering the slow economic recovery in EU for somewhat of a depressed market for the next several quarters. But once again, we take the news as it comes.

And in terms of the new LIP market adoptions, I mean I mentioned Russia because we see -- we have seen a movement up towards getting ready for adopting LIP regulation and Russia and some of surrounding markets just want to remind everybody a very large market potential and if you size the CIS region, it is in fact slightly greater than the EU market in terms of potential.

So it's obviously a very important development for us. There's good reasons to believe that these LIP standouts will be adopted in late 2013 by the Parliament there but whether there would be also a communication as to a targeted implementation date for the LIP standout is totally unknown.

However, working with customers, whether it's Russia, whether it's Brazil, whether it's Japan, we have positive dialogue with them to anticipate and make sure that the industry is ready to match and comply with new regulations. And based on the activities that we have with our customers, I mean we remain hopeful that within the next two to three years at least one of these countries will have adopted LIP regulation and again, all of them are pretty large in nature and would be impactful to our earnings, probably six months ahead of implementation date.

And again, because of that, I think we expect next year to have clarity as to whether one of these markets will adopt LIP figuring the [talent] of 2014 or some time in '15. So we'll report it as we obviously are becoming aware of that.

Okay thank you. And then also just I guess adding onto the RTL, the decline in shipment, was there any area in specific that's an area of concern for you that you had forecasted better than expected results in terms of the shipments there?

Yes I think the EU market is kind of a sweet spot for RTL business and obviously that's one but probably isn't main driver for the slowdown in RTL volumes versus last year and we continue to develop new customers, new applications for RTL outside of the EU's own so I think it's primarily an EU market concern at the moment and not only the attrition rates but again, I'll remind everyone that there is clearly a very important change, set of changes, revisions that are planned for next year in this tobacco product derivative.

Whether it's affecting the packaging of cigarettes, it's affecting the disclosure of ingredients, the ban of menthol or other flavors in cigarettes, there's a lot of stakes for all the cigarette companies looking at possible changes to this product derivative and but in itself is kind of not freezing but certainly slowing down the pace of innovation, which obviously is something that we tend to strive in terms of creating growth in the market of these. There's no growth in it.

Okay. Thanks a lot, gentlemen. I appreciate it.

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

Thank you, Laurie, and thank you all for attending the call and we certainly appreciate your interest in the Company. Mark, Jeff 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. That does conclude today's conference call. You may now disconnect.