Mativ Holdings Inc (MATV) 2015 Q1 法說會逐字稿

Welcome to SWM's first quarter 2015 earnings conference call.

Hosting the call today from SWM is Frederic Villoutreix, Chairman and Chief Executive Officer.

He is joined by Bob Cardin, Corporate Controller and Interim Chief Financial Officer; and Mark Chekanow, Director of Investor Relations.

Today's call is being recorded and available for replay at 1-855-859-2056, and the conference ID number is 29140646.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions).

It is now my pleasure to turn the call over to Mr. Chekanow.

Sir, you may begin.

Thank you, Kat.

Good morning.

I am Mark Chekanow, Director of Investor Relations at SWM.

Thank you for joining us to discuss SWM's first quarter 2015 earnings results.

On today's call, Frederic will share some high-level comments about our first quarter performance, strategic priorities, and details on our operations.

And Bob will take you through a review of our financial results.

We'll then take your questions.

Before we begin, I would 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 our 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 currency impacts, resilient accelerated depreciation, depreciation and amortization, capital spending, capitalized software expenditures, restructuring and impairment expenses, results of discontinued operations, noncash amortization expenses, startup costs of a new mill, and purchase accounting adjustments and are, therefore, non-GAAP financial measures.

Reconciliations of these measures to the closest GAAP measures are included in the appendix of this presentation and the earnings release.

This presentation and the earnings release are available on the Investor Relations section of our Website, www.swm.com.

I'll now turn the call over to Frederic.

Thank you, Mark, and good morning, everyone.

Late yesterday, we released our first quarter 2015 earnings, and this morning, we'll present our financial results and business updates.

I would like to begin the call by quickly reviewing our financial performance and providing some color on the key factors that influenced our results during the quarter as well as review the trends and developments we see unfolding in 2015.

First quarter adjusted diluted EPS from continuing operations was $0.74.

We consider our financial performance in line with our expectations as it relates to achieving our annual guidance for adjusted EPS of $3.50, which included $0.20 of adverse translational currency impacts when originally issued in February.

As expected, currency impacted our European [heavy] operations.

But, we highlight that our top line was up slightly, excluding currency impacts.

Although growth from diversification stabilized our top line, and continued execution of our diversification strategy to transform SWM into a growth-oriented company remains top priority.

We are on a path to create scale in our high-growth filtration segments to complement our mature high cash flow tobacco operations.

We also expect our quality EPS to ramp up throughout the year.

Growth investments, projected improvements in parts of our business, and certain initiatives are expected to contribute to escalating profitability throughout 2015.

A few key trends we expect to play out in coming quarters in our tobacco operations include the acceleration of earnings on our Chinese recon joint venture, operational improvements in our newly rebuilt paper line in France, and the staged realization of benefits from 2014 restructuring activities in France.

Within the filtration segment, the completion of acquisition integrations, the commercial launch of DelStar Poland, substantial operational excellence projects to drive cost efficiencies, and projected lower resin prices are expected to boost profits.

All told, first quarter financial performance was generally as we expected, and we look for steadily improving quarterly results as a result of these factors.

Looking beyond 2015, our sights remain set on redeploying the strong cash flow from tobacco toward diversified end markets, specifically filtration, medical, industrial, and other specialty applications, as well as providing a healthy return of cash to our investors through dividends.

We continue to actively evaluate strategic additions to our business.

As discussed last quarter, while the acquisitions we executed in late 2014 were highly strategic and offered solid growth prospects, our bias will be toward more sizable transactions to scale our nontobacco operations.

I will now provide updates on several of our key strategic priorities and developments.

(inaudible) completed its first full quarter of production.

The adjusted EPS contribution of the JV was modest during the quarter but was generally in line with expectations.

During the first quarter, the facility was largely producing goods we expect to sell in the next two quarters, and we expect the JV's contribution to our financial reserves to steadily increase throughout 2015.

We remain confident in the $0.16 expected adjusted EPS benefit for 2015 as we work closely with our 50-50 JV partners while also with customers to deliver a very profitable first year of our share of investments.

Regarding the two filtration segment bolt-on acquisitions completed this past December, we spent the first quarter focused on integration.

As anticipated, the deals were slightly accretive to first quarter 2015 results when viewed in aggregate.

Specifically, the medical assets we acquired from Smith & Nephew continued their steady performance with our integration focused primarily on finance, IT, and HR processes as this was a carve-out transaction.

We are pleased with both our integration progress and the commercial alignment with our existing medical business and see opportunities to grow this newly acquired resin-based rolled goods and technology.

Regarding our early-stage air filtration asset acquisition, the integration process has been more focused on upgrading operations, adding personnel, establishing SOX-compliant processes, and other general activities associated with a less-seasoned operation.

We believe the assets and customer relationships we acquired, while requiring some upfront investments, are capable of delivering long-term growth.

Moving to our LIP business and the South Korean LIP implementation, to our knowledge, there's been no change to the expected LIP compliance effective date of July 2015.

However, there remains uncertainty regarding implementation, compliance, and enforcement of the LIP standards.

For this reason, we continue to assume only a nominal benefit on South Korean LIP in 2015.

Regarding LIP patent litigation, we have no public updates to provide beyond what is in our filings.

While not particularly significant, we are incurring some legal costs.

I will now discuss our operations and quarterly performance in more detail.

Tobacco paper volumes in the first quarter, including our paper JV in China, were down 2.4%.

We consider this performance relatively in line with global attrition rates, especially those in our key mature geographies.

Within tobacco papers, our LIP volumes declined 6.4% in the first quarter.

However, the majority of the decline was attributed to an anticipated share rebalance with one customer.

Our LIP volume performance with other customers was relatively solid, considering smoking attrition pressures.

Our tobacco paper mix remains a challenge, given the relative underperformance of LIP as well as the mix of certain other tobacco papers, which impacted profitability during the quarter.

On a positive note, we were pleased to secure a nuclear extension with one of our large LIP customers.

Outside tobacco paper, our internal paper [deoxification] efforts managed under advanced fibers and materials business unit, or AFM, is tasked with further penetrating nontobacco end markets, and through a combination of activities, we are beginning to see some positive results in our product mix.

For example, we have gained an attractive niche food service and packaging applications.

And over time, we expect to be more significant nontobacco volumes as a result of our investments and focus on our AFM business unit.

Shifting now to our recon segment, we were pleased to report volume growth of 6% in the first quarter, marking the first quarter since mid-2012 that segment volumes increased versus the prior-year quarter.

Some of that increase was due to certain sales shifting from fourth quarter 2014 to first quarter 2015 as a result of previously discussed labor strike at our French mill.

2014 was extremely challenging for our recon segment, forcing us to significantly restructure operations to match current demand.

We did encounter some mix issues in Q1 within the segment, as expected, given the new regulations in Europe, which impacted our wrapper and binder products.

The bottom line is that the 2015 segment performance is expected to be stable and that SWM overall recon footprint, which now includes our Chinese JV, shows first quarter sales volume growth of 19%.

Moving to our filtration segment, we were pleased with segment performance as the base DelStar business delivered on plan for the quarter.

We have another aggressive sales growth plan in 2015 for our filtration segment.

And first quarter results (inaudible) that expectation.

We are seeing particular strength in the industrial end markets, including the wind turbine blade manufacturers, who are increasing their ordering, as we discussed last quarter.

The build out of DelStar Poland is essentially complete, with commercial operations beginning in the second quarter.

Our filtration operations are now well established in Europe, cost competitive, and we expect them to soon deliver savings on existing European sales and provide a platform for accelerated growth.

While this investment was a significant drag on segment profitability, our first quarter saw a peak in operating expenses, such as production trials, training, travel, [solid] costs, etc., we expect profit contributions for the remainder of the year.

In addition to the expansion in Poland, we have [coming] significant new projects to drive costs out of the business.

For example, we are implementing a scrap recycling program which is expected to deliver more than $1 million of annualized savings.

Given DelStar's size, these projects are expected to drive materially better margin performance in the back half of 2015.

And when combined with lower expected resin prices as a result of falling oil prices, we expect a strong ramp in segment profitability throughout 2015.

Frankly, our filtration segment is bustling with activity, the integration of two acquisitions, the launch of DelStar Poland, several major operational excellence initiatives, all on top of the growing base business and continued effort to acquire additional complementary companies and/or assets.

We are investing in our filtration segment for the long term, building scale, improving operations, and developing synergies, while remaining focused on the execution of the robust 2015 action plan.

I will now turn the call over to Bob Cardin, our Corporate Controller and Interim CFO.

Thank you, Frederic.

I'll now review our financial performance, beginning with sales, which were largely as expected across our segments.

In general, currency movements were negative for the quarter as the euro's weakening versus year-ago levels was significant.

First quarter net sales decreased 8.2% from the year-ago period.

On a constant currency basis, first quarter net sales were estimated to be up 0.5%.

Excluding the fourth quarter 2014 acquisitions, net sales would've been down 11.6% or down 2.9% on a constant currency basis.

The acquisitions contributed $7.1 million of net sales during the first quarter.

And currency movements had a $17.8 million negative impact on net sales.

First quarter paper segment net sales, which includes nontobacco paper but excludes sales from our Chinese JV, were down 15.7% versus the prior-year period.

While currency has the largest impact on segment net sales, accounting for more than half of the decrease, lower volumes, planned LIP pricing concessions, and unfavorable mix also contributed to the year-over-year decline.

All of these operational factors were generally as expected.

In the recon segment, despite 6% sales volume growth during the first quarter, net sales declined 12% or $5.3 million.

Currency movements reduced net sales by an estimated $6.1 million, resulting in approximately 2% constant currency net sales growth.

The filtration segment generated 27.8% net sales growth in the first quarter.

Currency impact was immaterial.

Excluding the December 2014 acquisitions, the base business delivered 5.5% top line growth.

Adjusted operating profit was down $9.3 million in the first quarter versus the year-ago quarter, with $1.9 million of unfavorable net currency impacts.

Note that, in the table shown on this slide, the four bars on the left represent changes due to gross profit items.

Nonmanufacturing represents changes in SG&A, and net currency is shown on the far right.

While we had previously shown the DelStar acquisition as a separate item, the late 2014 asset acquisitions are not material to SWM's overall results and have been consolidated into the table.

Paper segment adjusted operating profit during the first quarter was down approximately $6.4 million versus the same period in 2014, with adjusted operating profit margin of 14.8%, down 270 basis points versus the prior-year quarter.

The relative underperformance of LIP volumes this quarter, planned price reductions, as well as some production inefficiency with the restart of a newly rebuilt line in France were the primary drivers of the decline.

These factors were partially offset by savings from the capacity rationalization in Brazil and other cost-saving efforts across the segment.

We expect the manufacturing inefficiencies to reverse in the coming quarters and a slightly improved mix as the year progresses.

For the recon segment, adjusted operating profit in the first quarter of 2015 was down $1.6 million.

So, adjusted operating margin in the first quarter was 37.8%, an increase of 90 basis points versus the prior-year period.

Absent a currency translation hit of $2.3 million, segment adjusted profits would've been up versus last year.

Sales volume gains and improved cost structure were partially offset by negative mix impact.

As mentioned, the savings from restructuring in the recon segment are expected to be realized progressively throughout 2015.

The filtration segment reported adjusted operating profit of $4.1 million in the first quarter, down $400,000 versus last year's first quarter.

The startup costs associated with completing the Poland expansion investment totaled nearly $0.5 million during the first quarter.

So, initial sales are commencing in Q2.

These startup costs are included in our adjusted operating profit.

In addition, due to the early-stage nature of our acquired air filtration assets, the facility operated at a loss of a few hundred thousand dollars during the first quarter.

However, steady profit improvements are expected throughout the year as operations gain efficiency.

Further, versus last year, we have made several hires to support additional top- and bottom-line growth, resulting in higher SG&A in the base business.

All told, despite reported declin in profitability, we have made significant investments in people, capacity, and technology from which we expect to drive substantial long-term benefits.

The business is healthy and expects it to generate steadily accelerating profits throughout the year.

Unallocated corporate expenses increased by $0.9 million in the first quarter.

While there were many puts and takes, some of the key drivers of the increase included changes in certain (inaudible) to corporate as a result of our restructuring and organizational changes, investments to support our AFM business, and higher legal cost as a result of our patent infringement litigation in Europe.

Our first quarter 2015 adjusted diluted earnings per share from continuing operations was $0.74 and did include approximately $0.08 of negative currency translation impacts.

As a reminder, purchase price accounting adjustments for acquired intangible assets within the filtration segment, startup expenses on the CTS joint venture, and restructuring costs and certain other expenses are excluded from our adjusted EPS.

For the first quarter of 2015, our tax rate was 24%.

But, for the full year, we can continue to expect a tax rate in the low 20% range.

While we acknowledge that first quarter adjusted EPS annualizes to approximately $3 per share, below our annual guidance of $3.50, we reiterate this result was in line with our expectations.

To review some of the trends and developments expected in the remainder of 2015 relative to our first quarter results, we highlight the CTS ramp up, improvements on a rebuilt paper line in France, staged benefits of prior restructuring activities, higher operating profit contributions from our recently acquired assets, lower integration expenses, commercial launch of DelStar Poland, filtration segment operational excellence projects, lower resin prices, and a lower expected tax rate.

Regarding cash flow and liquidity, there were no major events or capital investments during the first quarter of 2015.

Our net debt to EBITDA remains relatively low and provides ample balance sheet capacity to pursue acquisitions despite the devaluation of our euro-denominated cash balances.

I will now turn the call back to Frederic for his closing comments.

Thank you, Bob.

We are encouraged by our first quarter performance in the context of achieving our 2015 plan.

While currency has been a headwind in 2015, it was not wholly unexpected.

Our paper segment remains challenged by smoking attrition and the LIP pricing.

But, again, there were no meaningful surprises.

Our recon segment appears poised for stable 2015.

And the growth prospects regarding our Chinese recon JV remain promising and highly visible.

In our filtration segments, we continue to invest for profitable growth and have a wide set of opportunities to drive top- and bottom-line performance.

Overall, we believe our diversification strategy is delivering intended results as on a constant currency basis, as [the] top line is relatively stable.

Importantly, nearly 30% of total revenue generated in first quarter was outside of the tobacco industry versus a nominal contribution before the DelStar acquisition.

Cash flow from tobacco is expected to remain quite strong.

And our M&A team is working diligently to identify diligence and close acquisitions of high-growth companies to steadily transform our revenue composition and long-term growth profile.

Regarding our recently announced management changes, I want to reiterate that the decisions of our former CFO to retire and our COO to resign were not indicative of any operational, financial, or strategic issues, though we appreciate the sensitive nature of such an announcement.

Our CFO search is in process.

And we are considering both internal and external candidates.

In the meantime, I would like to commend Bob Cardin on a job well down assuming the CFO responsibilities.

Rest assured we are in capable hands as we evaluate our longer-term options.

Regarding the COO role, while we consider the best structure as we grow our nontobacco businesses, our three business heads in tobacco, filtration, and ARM are each reporting to me.

Many of you may recall I was COO of SWM prior to taking the CEO position.

And I'm comfortable assuming direct oversight of our operations.

We look forward to the quarters ahead and sharing progress on the execution of our 2015 plan.

That concludes our remarks.

Kat, please open the line for questions.

(Operator Instructions).

Alex Ovshey, Goldman Sachs.

Great.

Thank you.

Good morning, everyone.

Morning.

Morning, Alex.

Couple of questions for you.

How are you thinking about the longer-term growth rate for the RTL volume?

Too early to tell.

We don't have enough visibility to have -- right now, as you know, historically, volume discussions with customers about the following year takes place in the fall.

And obviously, we have some positive news in terms of stabilization of the attrition rates in the Western markets.

But, there are other variables that we need to consider.

So, too early to provide an answer on that.

Okay.

Understood, Frederic.

And then on the LIP side, can you talk about where we are in this pricing reset cycle?

When do we cycle through that headwind?

Yes, I think the full effect of the pricing reset is (inaudible) was visible in the first quarter.

I think our point is that it's probably -- so, it's not going to get worse in the quarters to come.

And in fact, we may see a slight improvement, not necessarily on the pricing, but more on adjusting your cost down.

So, the operating profit of the paper segments, driven by cost initiatives, the full benefit of restructuring actions that took place last year, and the stabilization of pricing, including LIP, should help to see improved profit margins for that segment in the quarters ahead.

Thanks, Frederic.

And just last one, just thinking about the M&A pipeline for filtration, can you just talk about what it looks like and where our seller expectations are, multiples at levels that are reasonable enough for transactions to potentially take place in the near term?

Yes, let me address this question.

It's a lot of questions about filtration, the filtration segment.

I just want to remind everyone that there are many things we look at that complement DelStar.

DelStar is not just pure filtration play.

Obviously, we saw last year the acquisition of the UK assets, the acquisition on medical, but what we're also looking at similar technologies with good synergies potentially in other end markets.

It could be in industrial, for example.

So, going back to your question, I think we have a healthy pipeline.

We are making -- I'm happy with the progress that we are making.

I think there are some, obviously, challenges in terms of variation.

But, I feel good about some of the prospects that we have ahead of us.

And as I restated in our prepared remarks, and the company is posed to continue to build on our nontobacco platform, both through organic and inorganic moves.

Thank you, Frederic.

(Operator Instructions).

Dan Gicome, Sidoti & Company.

Good morning.

Thanks for taking the time.

Just staying on the topic of the search for a full-time CFO, can you just give us a little bit of color on sort of what type of background you're looking or screening for?

I know, when Jeff was onboard, an attractive part of his background was his substantial background in M&A and restructuring.

So, just wondering how you're looking at that.

Good morning, Dan.

Yes, I think that's one -- what I'm looking at is a business executive that can be a partner to the leadership team in terms of moving forward our strategy and, obviously, in transformational strategy through strategic roles, actions.

M&A is obviously a key complement.

But, there's also to be a fit with the hands-on culture and that we have at SWM.

And I think it's good progress being made.

And I think you pointed on one of the skillset that is important for our CFO and all the executives to have within the leadership team of SWM.

Okay.

And then moving quickly to the RTL segment, nice job there.

I guess we saw the first -- it looks like margin improvement first time in -- I don't know -- I'm counting 10 quarters.

Just wondering, with so much erosion in the last two years, do you think we're out of the woods now?

And how are you -- how should we be thinking about that going forward?

Is it fair to assume we should be able to recover at least maybe half of the erosion we saw in 2014?

Yes, I cannot -- again, I think it's too early to talk about 2016 and beyond.

So, as far as 2015, we -- I think the high 30% range in terms of operating profit for the RTL segment is solid.

We have -- I just want to point, to build on your question, there's obviously a lot of cost improvements taking place.

The restructuring of the LTR facility, recon facility in France, I think the benefits are just starting to impact positively our business.

So, it's really the second half of this year.

We have a carryover in the first half of next year where we get the full benefit of the restructuring action.

On the headwind, we have the mix change.

The wrapper and binder, it's a small segment, subsegment, within RTL.

That is a very profitable segment.

And as we had talked about changes in tax legislations in Europe making small cigars less attractive, and we are seeing some negative mix, if you want.

But, I think the numbers that we posted in terms of percentage -- [ROS] percentage is quite solid and maybe with some upside in the quarters to come.

Okay.

Great.

And then just housekeeping on the IP litigation, are the legal costs -- you're still seeing them as nominal, or is there a step up from when we last spoke?

No, it's going according to plan.

So, they are there, but not significant enough, not material enough for us to disclose that.

Okay.

Great.

Thanks a lot.

I appreciate everything.

You're welcome.

Thanks, Dan.

(Operator Instructions).

And I'm showing no further questions at this time.

I'd like to turn the call back over Frederic for any closing remarks.

Thank you, Kat, and thank you, all, for attending the call.

We certainly appreciate your interest in SWM.

Mark and I will be in our offices today.

And if you have any further questions, please give us a call.

Have a nice day.

Thank you.

Bye.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.