Mativ Holdings Inc (MATV) 2015 Q4 法說會逐字稿

Welcome to SWM's fourth quarter and year end 2015 earnings conference call.

Hosting the call today from SWM is Frederic Villoutreix, Chairman and Chief Executive Officer, he is joined by Don Meltzer, EVP of Advanced Materials and Structures, Allison Aden, Chief Financial Officer, and Mark Chekanow, Director of Investors Relations.

Today's call is being recorded and will be available for replay later this afternoon.

The dial-in number is 855-859-2056, and PIN number 32267763.

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. Chekanow.

Sir, you may begin.

Thank you, Vince.

Good morning, I'm Mark Chekanow, Director of Investor Relations at SWM.

Thank you for joining us to discuss SWM's fourth quarter and year end 2015 earnings results.

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 Security and Exchange Commissions filings including our quarterly reports on Form 10-Q and our annual report on form 10-K.

Some financial measures discussed during this call are 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.swmintl.com.

I'll now turn the call over to Frederic.

Thank you, Mark, and good morning, everyone.

I will provide some brief comments on how we finished 2015, and then give an update on our strategic transformation, detail of financial outlook of 2016 and share the key business and strategic objectives we'll be focused on this year.

Although we are pleased with our fourth quarter results which provided a strong finish to 2015.

Full year adjusted diluted EPS of $3.51, $0.01 above guidance and was a significant accomplishment given the substantial head winds we faced.

Solid execution in our Engineered Paper segment and (inaudible) strong fourth quarter LIP volumes more than offset the less controllable macro challenges from currency and the impact on AMS inflation product sales on very soft oil, gas and mining sector.

Our guidance assumed a $0.20 negative impact on currency, whereas the final impact was $0.37.

In addition, our guidance did not contemplate acquisition and the Argotec transaction diluted EPS by $0.03 due to transaction and integration costs.

Importantly, an LIP inventory build by several of our customers provided a $0.13 benefit to fourth quarter results, and upside of the portion of accounts headwind that we faced during the year.

We highlight, that on a constant currency basis, 2016 net sales actually would have grown 5.5%, and adjusted EPS grown 12%.

Also, our free cash flow remains strong at approximately $120 million.

In 2015 we delivered on several (inaudible) objectives critical for long-term transformation.

Now tobacco revenue, including non-tobacco paper sales, we are more than $230 million in 2015 and were presented approximately 30% of 2015 net sales.

With the addition of Argotec and increased growth in AMS, we expect this metric to increase substantially in 2016 to the 40% plus range, or approximately $350 million of revenue.

As a reference point, in 2013, our non-tobacco sales were only 6% of our total.

Our most significant (inaudible) milestone of 2015 was the acquisition of Argotec.

With attractive margin and growth and a strong competitive position in its core (inaudible) and segment, we believe this acquisition marks a substantial step forward in the expansion of our AMS growth platform.

We see a future which with opportunity to scale and optimise our AMS segment.

In conjunction with this acquisition, we also expanded our credit facility.

This added balance sheet flexibility coupled with strong cash flow from Engineered Paper supports continued MMA and internal growth on (inaudible) investments.

2015 also marks the (inaudible) and medical (inaudible) acquisitions.

While relatively small, we're highly strategic additions to (inaudible) and we successfully integrated these operations and achieved our stated (inaudible) targets of the year.

Additionally, we expect our recent management addition will play important roles in executing our growth strategy.

Both Don Meltzer, EVP of AMS, and Allison Aden, our new CFO, are making immediate contributions and I'm confident that our management team is poised to continue executing our vision of becoming a more diversified, growth-oriented enterprise.

Other key (inaudible) milestones we achieved in 2015 include the combination of our paper and recon segment to a more streamlined management and operating structure.

The successful expansion of our (inaudible) supply contract, and our expansion in China for our recon joint venture.

We also increased our dividend for the fourth consecutive year.

Despite achieving our 2015 guidance, delivering on several strategic objective and carrying good operating momentum into the new year, 2016 presents a combination of negative factors, either to project a (inaudible) EPS decline from $3.51 to $3.15.

However, we feel that this decline is not indicative of any long-term witnesses in our strategies or execution.

As shown on this slide, we expect strong accretion from the Argotec acquisition, as well as from several internal growth drivers, including organic growth of AMS, and our Chinese joint ventures, and operating cost improvements in Engineered Papers.

Part of the business fundamentals for approximately $0.55 of incremental EPS, illustrating the benefit of our diversification efforts affecting management of EP and growth investments in China.

We expect the stock (inaudible) category to more than offset the anticipated decline in up-share volumes, which with we estimate will impact EPS by $0.35.

As previously discussed, the expected declined is our reserve of customer (inaudible) activities in response to lower (inaudible) tobacco and (inaudible) prices.

Lower guidance in 2016 is driven by the anticipated absence in 2016 of certain non-recurring tax benefits of 2015, presenting approximately $0.20 of EPS, which neutralizes the projected (inaudible) state of our business momentum, as well as other less comfortable issues related to the timing of LIP sales and currency translation impacts.

The LIP sales timing and currency factors together account for the $0.36 projected EPS decline.

Why we believe that we continue to gain LIP share of fourth quarter LIP volume growth of more than 20% was a function of two (inaudible) one-time adjustments likely to reverse in 2016.

First, more restrictive packaging regulations effective in Europe as of May 2016, resulting in customers building LIP inventory.

We expect a reduction in the purchases from us starting Q2.

Second, the US customer built inventory ahead of plan, manufacturing Q3 changes.

We estimate the total EPS to be effective in 2015 and 2016 to be approximately $0.26.

Lastly, we estimate a currency translation impact of approximately $0.10 rest of 2015, which is reflected in our guidance.

As a result of these dynamics and the timing of the Altria volume decline, we expect our first half results to be stronger than our second half results.

All told, we face several near term issues which can be characterized as non-operational, such as tax, external, such as currency, and timing issues such as LIP, which will detract from our positive 2016 [business library?].

We view these factors as near-term obstacles with regards to 2016 EPS, (inaudible) natural roadblocks.

Looking longer term, management is committed to advancing our strategic transformation and not letting the newly and often less controllable challenges of any past year impede our repositioning (inaudible).

In light of the 2016 outlook we'll be highly focused on successfully exhibiting our strategy to ensure we exit 2016 with good operating momentum.

Each of our segments at the start of 2016 priorities, some of these action will likely extend beyond the year.

OAMS, a successful integration of Argotec and the achievement of financial plans are essential.

The basic integration of HR, finance and other aspects is largely complete.

Argotec has attractive modeling and growth prospects and we are confident this momentum will continue into 2016.

More broadly, we are in the early stages of implementing a vision for the four acquired businesses, with a creation of scalable operating model that generates sustained bottom line growth.

Another priority is replacing lost sales due to pressure of many of the customers customers are faced with the substantial (inaudible) of the oil, gas and mining segment.

Engineered Paper, 2016 (inaudible) on several ongoing themes.

First, using selective price concessions in LIP to gain and/or maintain share as we believe this strategy has proven effective.

While LIP remains a competitive area, we expect potential future price concessions to be generally less impactful than more resent years.

Second, we remain focused on efficiently managing our costs and capacity and expect to continue to taking measured actions to align infrastructure with demand.

Specifically in response to (inaudible) decline (inaudible) by one specific customer continuing (inaudible) initiative which began in 2014, (inaudible) explore additional cost reduction activities.

Lastly, we're continuing investing in diversification as we see potential to modify paper making and reconstitution capabilities in non-tobacco industries.

While RTL has been our only commercial reconstituted product, we are optimistic that reconstitution applications are key, (inaudible) and botanicals and to monetize over time.

Please visit our site www.(inaudible).com to see examples of our (inaudible) team work.

We now shift to detailing of segment performance.

Fourth quarter paper volumes including our Chinese joint venture, were up 6% year-over-year, finishing up 2% for the year.

Within (inaudible) paper, LIP volumes increased 21% in the quarter, with the customer inventory build, and finished the year up 4%.

Throughout 2015, we basically a positive mixture from LIP volume trend, favorable mix trend within the LIP product set, and growth in roll your own paper.

Fourth quarter and full year RTL volumes were up 20% and 3% respectively versus 2014.

Finishing in line with our expectations.

Fourth quarter 2014 volumes were soft due to the labor related disruptions creating the favorable fourth quarter 2015 comparisons.

Including the ramp up of our Chinese recon joint venture, these volume increases would have been 33% and 19% respectively.

Fourth quarter non-tobacco paper volumes increased 12%, versus the fourth quarter of 2014, with full year volumes decreased 5%.

We shifted some of our production away from pure volumes, given solid demand for more profitability than paper throughout 2015.

We also saw 2015 growth in high margin valley (inaudible) of paper, driving several mix improvements.

Of note, EU and US smoking attrition appears to have closed in 2015, with consumption estimated to be down approximately 1% (inaudible) our customers.

Regarding China, headlines are indicating slowing tobacco growth and (inaudible) flattish consumption in 2015.

While we believe this is true overall, we continue to see good performance of a new to premium level brand or joint venture support.

I will now turn the call to Don to review AMS.

Thank you, Frederic.

Organic growth for the full year 2015 was down 1%, but excluding the impact of oil, gas and mining, currency and business transfers was up mid single digits.

This is versus a strong 2014 in which DelStar grew 10%.

While Argotec will not be reported as organic growth in 2016, it continues to deliver excellent growth versus year ago sales.

Demand for filtration products related to the oil, gas and mining industries continue to be quite weak.

While our products do not filter oil and gas, they are used in heavy equipment and machinery used in these industries, often filtering fuels and other hydraulic liquids, as well as serving other functions in the exploration processing and transport of oil and gas.

In addition, organic growth was impacted by currency movement and business transfers from our base DelStar operation to the acquired sites.

Together, these impacts comprised the vast majority of the fourth quarter decline.

Through the first three quarters of 2015, these factors were largely offset by strong water filtration sales, but this was not the case in the fourth quarter as some customers appeared to push orders out into 2016.

For the year, water filtration sales grew by more than 10% and our end segment outlook for 2016 remains solid.

While impossible to predict a commodity rebound and recovery of filtrations sales to oil, gas, and mining sensitive customers, these filtrations customers are finding other areas to further penetrate, such as power generation and aerospace.

Similar to our customers, we are also actively assessing opportunities to profitably replace those lost sales and this backfill is a key priority.

While low valued sales are relatively easy to find, they're not strategic and do not support our overall vision of emphasizing high value engineered products that compete on innovation and performance.

One exciting organic growth opportunity is the development of a new filtration product to service the semi-conductor industry.

Our R&D team have worked closely with customers to develop a new technology, which we expect to provide superior performance versus legacy liquid filtration materials used in demanding ultra clean chip manufacturing processes.

AMS's organic growth is the high priority and we remain committed to investment that will support long-term top and bottom line expansion.

We've also responded to sales weakness with cross-actions that began in the fourth quarter and contributed to a segment margin expansion.

Lower resin prices and other operating improvements contributed to the fourth quarter margin expansion of 250 basis points versus the prior year quarter.

2016 also presents opportunities for further integration of our acquired businesses.

Our vision is for these companies to run as one seamless unit benefiting from scale, optimized manufacturing, synergized commercial strategies, shared services, and aligned R&D.

This will be a multi-year transition, but we intend to make significant strides this year, and the results should become evident in margin expansion this year and beyond.

We will likely implement a common ERP system across our core acquired businesses in order to gain efficiencies and enhanced business intelligence capability.

This is likely to be a stage two-year project.

SWM's expertise in operational excellence also figures heavily into our plan as this core competency has not yet been fully deployed across the growing AMS operations.

With best in class global assets, technologies and sales organizations, we believe the opportunity across the segment is significant and we look forward to sharing our progress on this front.

I'll now call the turn over to Allison.

Thank you, Don.

I'll now review some financial highlights in the fourth quarter and full year.

Fourth quarter consolidated net sales grew 15.5%, or 23.4% on a constant currency basis compared to the fourth quarter of 2014.

The quarter benefited from the customer driven LIP inventory build, the Argotec and AMS both on acquisitions, and the soft year-over-year comparisons for RLT.

Fourth quarter 2015 EP segment net sales were flattish versus fourth quarter 2014, but increased 10% on a constant currency basis, driven largely by LIP.

Within AMS, net sales nearly doubled in the fourth quarter versus 2014, however, excluding the affects of acquisitions, sales declined about 8% for the reasons Don mentioned.

Consistent with positive volume and mix trends, we saw good margin performance in the fourth quarter, with EP and AMS segment adjusted margins up more than 500 basis points and 250 basis points respectively.

Full year results were influenced by our strong fourth quarter finish.

While full year consolidated net sales were up 5.5% on a constant currency basis versus 2014, excluding currency and acquisitions, our net sales declined about 1% versus 2014 illustrating fairly stable EP operations and a slight decline in organic growth within AMS.

Despite currency head winds, our overall adjusted operating margin grew slightly in 2015 as EP performed better than originally expected.

Recall that 2015 results included a meaningful impact from LIP price concessions, which were offset by cost improvements and positive shifts in product mix.

Fourth quarter 2015 adjusted diluted earnings per share from continuing operations was $0.91, putting our full year adjusted EPS at $3.51, just above our guidance.

As mentioned, currency head winds were $0.17 worse than assumed in our 2015 guidance and the Argotec solution was not contemplated in our guidance.

Of note, the delusion from Argotec stem entirely from transportation fees and integration costs.

Both the currency head winds and Argotec Solutions were overcome through strong results from Engineered Papers.

In addition, our effective tax rate for 2015 was approximately 20%, at the bottom of the low 20% range we had projected.

A portion of the tax benefits realized in 2015 as part of the Company's global asset realignment efforts are non-recurring nature.

Hence, our expected tax rate will trend higher in 2016.

Going forward, our effective tax rate will fluctuate depending on our mix of earnings and various jurisdictions within differing tax rates, as well as potential changes in the business, such as M&A and business realignment.

While we achieved 12% constant currency EPS growth in 2015 on $3.46 to $3.88, our guidance reflects a decline in 2016.

However, when reviewed over a two-year period, the compounded result is more stable.

As shown in this slide, the cumulative two-year currency impact on adjusted EPS from 2015 and the projection for 2016 totaled $0.47.

Adding this impact to our 2016 guidance of $3.15 implies total constant currency growth of nearly 5% from our 2014 adjusted EPS up $3.46.

This multi-year perspective demonstrates that while our annual growth may vary depending on the unique challenges of the tobacco industry, we've offset that pressure with successful diversification efforts in AMS and other improvements in our paper business.

Regarding cash flow and liquidity.

SWM remains in a solid position.

2015 free cash flow of approximately $120 million declined $11 million from last year with exchange rate movement creating a meaningful downward impact.

Additionally, we benefited from lower CapEx in 2015 versus 2014, and our depreciation add-backs declined by $4 million.

From a leverage perspective, for the terms of our new credit agreement, we were at 2.3 times net debt to EBITDA as of year end 2015.

Our credit facility terms have certain adjustments to our EBITDA and net debt calculations, thus our leverage cannot be derived solely from our reported balance sheet and EBITDA metrics.

In the fourth quarter, we repatriated nearly $150 million of overseas cash in a tax efficient matter, demonstrating the effectiveness of our global asset realignment in improving access for these funds.

We used the repatriated cash to repay a portion of the debt related to the Argotec acquisition.

Absence significant investments for acquisitions, we would expect to continue paying down our debt.

Regarding our announced reporting structure change effective for our fourth quarter and year end results, we consolidated the former paper and reconstituted tobacco segments into a single reporting unit, Engineered Papers.

The reporting change mirrors the organizational and managerial realignment that consolidated two operations under a single business leader, and combined sales of the core functions.

Additionally, we concluded that our paper and recon operations, products, and customers were no longer distinctly different on a relative basis compared to our AMS operations, which produced resin-base goods sold into multiple segments.

In the future, the key metrics we intend to provide for the Engineered Paper segment will be; total cigarette paper volume, including our Chinese JV, total RTL volumes including our Chinese JV, and non-tobacco paper volumes.

We will report sales and adjusted operating profit for the combined segments and intend to comment generally on volume trends for key products such as LIP and RTL as appropriate to explain our results.

There will be no changes in how we report results for the AMS segment.

Now, back to Frederic.

Thank you, Allison.

In closing, I want to reiterate two key messages.

First, the successful strategic transformation of SWM is ongoing.

We made considerable progress this year with Argotec acquisition to expand AMS.

The credit facility expansion, and management team build-out, not to mention the solid execution in our high cash flow Engineered Paper segment.

Second, despite the head winds affecting our 2016 outlook, we take a long-term view and are focused on key business and strategic priorities that are largely within our control.

Executing on these plans will help set a solid foundation for improved financial results (inaudible) horizon.

We believe that we have been patient and disciplined in our transformation process and taking the right strategic actions, knowing some years it may be overshadowed by external factors such as currency, interim challenges of the tobacco industry, such as (inaudible) weakness, evaluation impacts (inaudible).

Our commitment to our diversification strategy remains strong and our management team is up to the task of ended 2016 challenges and emerging better for (inaudible) long-term growth.

Our commitment to return capital to investors also remains unchanged as demonstrated by raising our dividend this year, marking our fourth consecutive annual increase.

We appreciate your continued interest and support.

That concludes our remarks.

Vince, please open the line for questions.

Yes, Sir.

(Operator Instructions).

Our first question is from Dan Jacome, of Sidoti.

Your line is open.

Good morning.

Hey, Dan, good morning.

Thanks for taking the time.

I had several questions, some bigger picture, some housekeeping.

Just first on LIP, and sorry if I missed it.

Did you provide some sort of level of order of magnitude for how much pricing could be down this year?

We have not.

Recall last year during the course of the year is that we are seeing some moderation in the price pressure.

We had quantified the impact in 2014 in the range of $8 million to $9 million, and we say that the pressure on pricing in 2015 was greater than 2014.

However, as you can see, we have mitigated that through market share gains, improved mix in LIP, as reflected in the performance of the paper segments throughout 2015.

When we look at 2016 and forward, we see moderation of the price erosion, also provides to incrementally gain share or maintain existing share.

Okay, appreciate that.

Turning to RTL, I know 2016 kind of world telegraph the challenges, but in the press release, I think you guys mentioned continued volume challenges in future years.

Just wondering if you can provide some color there.

Is that a function of just dynamics and virgin leaf supply, or is there something else in the marketplace that's happening?

Like we have since 2014, we have seen some re-branding in the formulation of the cigarettes and 2016 it's impacted by the continuation of that strategy by your key customer, which impacts our volume projection down.

The financial assets for recon overseas impacted by the attrition outside of China, which compounds the affect.

The (inaudible) activity we believe is linked to the availability of large quantity of natural leaf tobacco right now.

Now, the view is that the 2016 tobacco crops is expected to be down which would help with the balancing supply with demand.

Now, it's too early to say what the impact would have on re-branding itself because it's typically a (inaudible) cycle, but the driver for the re-branding, we believe, Has been the availability of cheap leaf tobacco materials.

Okay, great.

A couple of housekeeping questions.

Is the resin prices, I guess they're lower so there's a tailwind for our cost.

Does that carry into 2016 as well?

So far, yes.

Okay.

Great.

Then just the Argotec, the contribution of $0.20 for 2016 looks intact.

Just a reminder, that's net of the incremental interest expense, correct?

Yes.

That's correct.

Okay, great.

Just wondering is the ERP project; is that in your guidance?

The cost associated with that?

You said it would be phased over two years?

Yes, it is.

Okay.

And then lastly, just big picture.

I was wondering, FX challenges, came in a little worse than expected.

Do you have a formal hedging program or how do you guys view that?

Dan, I think in general the way that we pulled in the currency into our estimate is based on recent currency less levels.

So in general, our hedging policies are very balanced.

And I think it's probably fair to say that our 2015 assumptions on currency proved not to be conservative enough.

We're trying to take recent rates into account and not over rely on just today's rate when setting our full-year guidance.

And remember, when we think about currencies in relationship to our business, we're affected by the Euro, but also by the Brazil REIT and we do business in Poland and China, so those currencies also have an affect upon us.

Okay, understood, thank you.

Last one.

On the repatriation of cash, is there some lead time, significant lead time associated with that or are you basically able to go out and implement that when you need to as quickly as you can?

So the repatriation of cash that we see was a result of a multi-year global asset reallocation, so these are larger, longer term projects in nature.

Okay, great.

I think that's all I had right now.

Thank you.

At this time, I would like to turn it back to management for any closing remarks.

Thank you, Vince.

Thank you very much to everyone for your participation and interest in SWM.

Allison, Mark and I are in the office today and available to take any questions that you may ask.

We look forward to updating you on our progress and results again in May.

Have a good day.

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

This concludes the program.

You may now disconnect.

Everyone have a great day.