Mativ Holdings Inc (MATV) 2013 Q3 法說會逐字稿

Welcome to SWM's Third Quarter 2013 Earnings Conference Call. Hosting the call today from SWM is Frederic Villoutreix, Chairman and 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 73748900.

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. Checkanow. Sir, you may begin.

Thank you, Jackie. Good morning. I am Mark Checkanow, Director of Investor Relations at SWM. Thank you for joining us to discuss SWM's third quarter 2013 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 we will then take your questions.

Before we begin I'd like to remind you that the comments included in today's conference call include 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 quarterly report on Form 10-Q and our annual report on Form 10-K.

Certain financial measures discussed during this call exclude restructuring and impairment expenses, results of discontinued operations and valuation allowances, and are therefore non-GAAP financial measures. Reconciliations 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 third 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, our third quarter showed solid earnings performance despite soft top-line reserves, which were consistent with challenging industry dynamics.

Revenue declined 5% as we experienced decreases in both our paper and reconstituted tobacco segments. Within the paper segments, LIP volumes were down 4% consistent with some of the industry volume declines reported by our customers.

We are encouraged, however, that some of the steeper smoking attrition rates seen earlier this year, particularly in the US, appear to be easing. Within the RT segments we saw volumes decline 21% in the quarter but we note that this appears to be another lumpy quarter with better performance expected in the fourth quarter. We'll explain more on that [plan] shortly.

We achieved adjusted earnings per share from continuing operations of $0.95 in the quarter bringing us to $2.91 year-to-date. We remain comfortable that we can achieve a full-year guidance of $3.75 as we enter the fourth quarter, which typically carries more EPS due to planned machine down time.

Cash flow from continued operations in the third quarter was just over $40 billion bringing our year-to-date cash flow from continuing operations to $121.2 million. We have a net cash position of $71.3 million as opposed to a net debt position of $4.8 million at the end of 2012.

Looking ahead and in the absence of any nearer-term regional LIP conversions, we expect smoking attrition rates in the mature North American and European markets to influence our reserves. However, we look forward to the expected 2014 opening of our new reconstituted tobacco joint venture, CTS, in China along with continued focus on the operational excellence to provide some offset to these industry trends.

SWM's tobacco paper volume including our China Paper JV declined year-over-year by only 2% in the third quarter as volumes from our China JV posted double-digit growth. This overall performance is very encouraging in an environment where mid single-digit sales volumes declines reported by our customers have been the norm for much of the year.

As we have said in the past, there will be times when we can gain share. However, over the long-term it is more reasonable to expect our volumes to conform to [overall] industry trends.

Moving to operational metrics on slide five, third quarter paper segment revenue, which includes non-tobacco paper but excludes sales from our Chinese JV, was down 3%.

Third quarter LIP volumes decreased by 4% versus the prior year; however, they remain up 3% on a year-to-date basis.

As you all know, LIP sold primarily in the mature North American and European markets and we believe this quarter's decline is a reflection of smoking attrition rates as well as a comparison to a strong third quarter of 2012.

Despite these declines in cigarette paper, we maintain solid profitability in the paper segments, as Jeff will discuss further.

RTL posted an unusually weak quarter and year-to-date reserves are comparatively challenged coming off record 2012 performance. As I indicated previously, RTL volumes decreased by 21% in the third quarter versus prior year and are down 11% on a year-to-date basis.

These results highlight the quality of volatility we experienced in these often lumpy segments. Given the annual commitments from our customers, we expect a sequential increase in fourth quarter 2013 volume. This would put full-year RTL volume down in the range of 10% reflecting the difficult 2012 comparison and high attrition rates in Europe.

We continue to monitor this trend closely and work with our customers to meet their needs. However, we are concerned that attrition rates in Europe, customer caution regarding inventory levels and the now expected lower usage of RTL in some tobacco blends could lead to another challenging year in 2014 for the RTL segments with further double-digit volume declines.

While we look forward to launching the Chinese RTL JV, which should be a strong source of volume growth for years to come, boosting RTL sales in Europe will require significant efforts including the successful launch of next generation products currently in developments.

We expect to provide further detail on volume expectations on our next conference call, once customer commitments for 2014 have been finalized.

I will now provide an update on several initiatives that support our long-term growth strategy. Within reconstituted tobacco we continue to collaborate with our customers to advance flavor improvements and reduce harmful attributes.

Our R&D teams have made progress in delivering an RTL product with improved taste, which could result in higher RTL use in our customer's tobacco blends over the long term. While unlikely to contribute to 2014 results, these products could make meaningful strides in the marketplace in 2015 and beyond as we test and gain acceptance from key customers.

In China, as 2013 draws to a close, we remain on track to open our RTL joint venture next year. We believe that our product is viewed in the region as the most sophisticated available and [will] be key in helping Chinese tobacco companies expand the consumption of premium cigarettes.

Premium cigarettes are the fastest growing segments and the strategic focus on the Chinese tobacco monopoly with one we have forged a strong alliance. While it is unclear the exact volume ramp we can expect from these lans in 2014, we highlight that our JV parnters have committed to running the operation at full capacity once RTL has been fully introduced into their tobacco brands.

As we have previously indicated, our expectation is for our share of the annual net income of the joint venture to be $8 million to $10 million, once fully ramped, which we could expect as early as 2016. We expect to incur a slight loss in 2014, due to the occurrence of normal starting costs, as we experienced at several CTM, our paper joint venture. But we expect CTS to turn profitable in 2015. Simliar to our CTM joint venture, CTS resuls will not be consolidated with SWM operating financials, but rather reported as net income from equity affliates on our income statements.

As we discussed last quarter, LIP adoption in Russia is on the front burner for regulators, with a vote on [standouts] expected by the end of this year. It is possible that we also receive an indication on timing of implementation, which would provide some clarity on the potential financial benefit to SWM. Russia is a large potential market for LIP and adoption could represent a significant profit boost for the company. We have no other updates on this front.

On the diversification efforts, we are exploring an increasing number of targets; we have expanded the corporate development team. While there is no news to report, we continue to evaluate possible initiatives. We continue to challenge our team to find the right transaction, to diversify the company by providing accretive returns to our investors.

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

Thank you, Frederic. Moving to slide 8, third quarter net sales decreased 5% versus the prior year quarter. While currency had minimal impact on revenues in the first half of the year, we did experience some benefit in the third quarter. On a constant currency basis, our revenue was down 9% in the third quarter. The paper segment revenue decline of 3% was driven by mix, as LIP volume declined 4%. We note these results exclude the strong growth we experienced in our China paper JV, which is recorded below the operating profit line as income from equity affliates.

Reconstituted tobacco segment volumes declined 21%, but improved mix and a strong euro helped to partially offset the impact on revenue, which dropped by 12%.

Turning to slide 9, tobacco paper volumes in the quarter, including CTM, our joint venture in China, were down 2% with LIP volumes down 4%. For the first three quarters of 2013, tobacco paper volumes are up slightly, a good performance, given overall market attrition rates. LIP volumes led the way, showing a year-to-date increase of 3%. We experienced another quarter of strong growth in non-tobacco paper volume, as we continue to see volumes of other paper products, such as wrapping materials for drinking straws, to maximize machine utilization.

Third quarter 2013 reconstituted tobacco volumes were down 21% compared to the prior-year period. As discussed, this was an unusually low shipment quarter, as our customers have carefully managed their inventories during a year of higher-than-expected smoking attrition rates. In line with our customers' annual commitments, we do expect a sequential increase in volume during the fourth quarter of 2013, while volume commmiments- while we are still working through customer discussions regarding 2014 volume commitments, early indications lead us to expect a meaningful and perhaps accelerated decline in 2014 RTO volume, as customers work through excess inventory and global smoking rates continue to decline. This outlook will be considered as we assess our RTL infrastructure and the level of capacity curtailment which might be required.

As you can see on the chart on slide 10, year-over-year quarterly adjusted operating profit declined by $5 million versus the third quarter of 2013. The impact of lower RTL volumes and price and mix changes in paper drove the decrease, but were somewhat offset by favorable currency effects, primarily from the strengthening euro.

As mentioned in our second quarter call, we expected rising wood pulp prices to impact us during the second half of the year. However, we were able to offset these costs through operational improvements.

As you will see on slide 11, paper segment profits during the third quarter were down only slightly through a comparable 2012 time period. The adjusted operating profit margin for this segment increased from 20.9% to 21.2%, driven by a continued focus on operational excellence and effective management of mill production efficiencies. Adjusted operating profit in the reconstituted tobacco segment for the third quarter of 2013 was down 15%, or $3.2 million. The decline was driven by a 21% volume decrease, partially offset by favorable currency and mix impacts. Our consolidated adjusted operating profit margin was 22.9%, down 130 basis points in the third quarter of 2012.

Our third quarter 2013 adjusted earnings per share from continuing operations, as shown on slide 12, was $0.95, down from $1.03 in the third quarter of 2012, which was record quarter for SWM. For the third three quarters of 2013, adjusted EPS from continuing operations are $2.91, and we are confomrtable that we will achieve our total year 2013 guidance of $3.75. We expect fourth quarter 2013 RTL segment volumes to improve over the third quarter results. However, as is customary, we will have planned mill down times during the fourth quarter.

As we look to our 2014, we will be cautiously planning for several factors. Overall cigarette smoking attrition rates are expected to negatively impact LIP volumes in the absence of any new regional LIP conversions. Similarly, and as Frederic indicated, we also forecast continued erosion of RTL volume levels. RTL volumes will likely decline faster than overall industry attrition rates, due to high inventory levels at our customers and modifications to tobacco blends with certain key customers. Despite these top line challenges, we will continue to competitively price our products to gain share where practical, pursue cost savings and efficiencies, and continue to develop next generation products to extend our industry and leadership position. In addition, we expect to start up the RTL mill in China during 2014, which will negatively influence income from equity affiliates, due to normal start up expenses.

On a positive note, we have several initiatives to optimize our legal entity structure, which is expected to result in more efficient conversion of future operating profit to cash flow.

Overall, given all these factors in aggregate, it is possible that our earnings could be lower in 2014. We expect to provide more insight in connection with our fourth quarter earnings release early next year.

Turning to slide 13, SWM net debt has decreased by $76 million since the end of 2012, as we now sit with a $71 million net cash position. This cash accumulation includes the impact our dividend increase from earlier this year. Our cash levels have risen to $222.5 million. We remain committed to returning at least 1/3 of our free cash flow to shareholders, as evidenced by the 20% increase in our quarterly cash dividend we announced yesterday. This is the third dividend increase during the past 15 months and now represents almost a five-fold increase in the quarterly dividend rate.

Despite a cautious view on 2014, the cash flow metrics of our business remain quite robut and reinforces the capital allocation strategy we announced earlier this year. Consistent with our capital allocation strategy, we expect the primary form of capital returns to be in cash dividends, while stock repurchases may be made on an opportunistic basis.

Regarding internal capital needs, we continue to evaluate multiple projects for the next several years in support of LIP expansion around the globe, completion of the RTL milll at our China joint venture, and activities aimed at securing our longer-term position in the large Asian region.

Now moving to slide 14, capital spending was $20 million year-to-date in 2013, flat with the comparable period last year. We still expect to the finish the year in the $25 million to $30 million range. Although we had expected equity investments in 2013 to be nearly $10 million as we near completion of the Chinese joint venture RTL mill, this has now moved into 2014. However, this is not indicative of any slip in the construction schedule for the new mill. We did not purchase any stock under the $15 million authorization, established in the fourth quarter of 2012. However, our board did extend the buyback program through the end of 2014.

As we have stated, our strategy is not to accumulate excess cash, and we believe that the nearly five-fold increase in our quarterly cash dividend rate in the past 15 months demonstrates our intent to provide solid capital returns to our shareholders.

Return on invested capital for the trailing 12 months ending in the third quarter, as shown on slide 15, was 22.6%, 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. ROIC is expected to remain strong in 2013, due to strong earnings and relatively stable levels of invested capital.

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

(operator instructions) Alex Ovshey, Goldman Sachs.

On the RTL side, you talked about some of your customers blending less of it into their product. Can you provide some more color around what is happening there and what is driving less consumption of RTL for some of your customers?

Sure. First of all, let me state, on this kind of reformulation happens all the time, and the reason we are mentioning that this quarter is I think related to some dynamics at play in Europe, at our- you know, are not necessarily solid and our forces that we have to deal with moving forward. The premium brands in Western Europe, which is really our sweet spot for RTL, are facing intense competition right now from lower-priced cigarettes, and our customers, several of our customers, have indicated that, you know, they are reformulating their cigarettes to add more high-quality tobacco, (inaudible) tobacco leaf in the blend as a way to fight back, you know, the loss of share they are experiencing. So they're deciding to go with more expensive raw material, if you want, as a way to fight back some pressure on market share.

Now conversely, we have [noticed] another trend, which is on the low-cost cigarettes, with the pressure on, you know, our customers are seeing to grow earnings, there are also some trends to replace RTL with very cheap tobacco and to some degree, except to, you know, [affect] the taste and (inaudible) for the sake of lowering the cost of the blend. So these are, again, not widespread. They are, you know, feedback in regard- in discussion with customers and [inaudible]. I would say that the biggest driver of the softness right now in RTL demand, current and projected into 2014, relates more to excess channel inventory and you know, this attrition rates in Europe, which has been greater than in the past.

That's very helpful. That's very helpful color. The second question for you, on the cost side, you know, what can you do specifically in the RTL segment over the next 12 months to help offset the weaker volume outlook?

Well, we are constantly working on, you know, a cost structure across the business units. Obviously, as volume declines at our RTL facility, we have to take additional actions to curtail cost and we have done some of that already, but we'll continue to do and likely we'll be prepared to implement more stringent measures as we get into 2014 if the outlook for declining volume is confirmed.

Got it. And just last question, you know, the balance sheet is in fantastic shape. You talked about the team working hard to find a potential opportunity to be able to utilize the balance sheet. Can you, again, just remind us, you know, what specific areas outside of what you're currently in you may be looking at and may be interesting for you longer term from an acquisition point of view?

Sure. I think, you know, as we stated in the past several quarters, our focus is looking at adjacencies, both from an organic growth aspect, and you know, so technical, engineered solution as it relates to segments like filtration, medical papers, (inaudible) specialty packaging, among several others. The discipline really for us is looking at, you know, in terms of external growth or acquisition prospects, some very high-quality assets that are market leaders in their niche, and obviously, we can add value as the owner of that, and as a list of financial metrics have to be met, as well, in terms of not affecting or just matching the profile of our margins and the quality of the assets and return on assets that we have.

Now, the most important aspect here and I think the third quarter [deserves] highlight, the fact that we need to find new legs of growth. We have growth of (inaudible) within our core businesses, but we also- there's a [secular] attrition rates outside of China, for smoking, that we have to deal with and the way I look at it is, the external growth agenda is a macro way of focusing on how we continue to strengthen the profitability of SWM and add some growth to it.

OK, thanks very much, Frederic.

(operator instructions)

Well, in the absence of questions, I'll thank you, Jackie. Thank you all for attending the call. We certainly appreciate your interest in the company. While disappointed in the RTL trends, we remain confident in the strength of our business model and our ability to bounce back, as evidenced by this 20% increase in the quarterly dividend we announced yesterday. Mark, Jeff, and I will be in our offices today, and if you have any follow-up questions, please give us a call. I understand there's a question that just came, to I'll give it back to Jackie.

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