Mativ Holdings Inc (MATV) 2016 Q2 法說會逐字稿

Welcome to the SWM second-quarter 2016 earnings conference call. Hosting the call today from SWM is Frederic Villoutreix, Chairman and Chief Executive Officer. He is joined by Allison Aden, Chief Financial Officer, and Mark Chekanow, Director of Investor Relations.

Today's call is being recorded and will be available for replay later this afternoon. The dial-in number is 800-585-8367. 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. Chekanow. Sir, you may begin.

Good morning. I am Mark Chekanow, Director of Investor Relations at SWM. Thank you for joining us to discuss our second-quarter 2016 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 Securities and Exchange Commission 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 our earnings release. This presentation and the earnings release are available on the investor relations section of our website, www.SWMintl.com.

I will now turn the call over to Frederic.

Thank you, Mark, and good morning, everyone. At Media, we are generally pleased with our overall performance and we consider our earnings performance for the second quarter and year to date in line with our expectations.

Second quarter adjusted EPS of $0.93 puts us at $1.73 for the first half of the year which annualizes well above our adjusted EPS guidance of $3.15 which we issued at the outset of the year. Similarly, our GAAP EPS performance is generally as expected.

As anticipated, the recent customer driven LIP inventory build started to reverse in the second quarter. RTL volumes declined and Argotec performed well. In addition, DelStar's organic sales stabilized in the second quarter, an encouraging sign after several quarters of pronounced topline challenges.

Other elements reflected in our second quarter GAAP and adjusted EPS included the timing of prior nonoperating gains on water rights sales and newly evolving challenges in the Chinese tobacco industry which we will elaborate on shortly.

Currency translation impact on GAAP and adjusted EPS was neutral for the second quarter which is better than we had expected. Execution was generally strong across our businesses and we continue to progress on our 2016 key strategic priorities. Non-tobacco sales again represented 40% of our total net sales in the second quarter. As anticipated, trailing 12-month free cash flow will likely trend lower for the second half of the year reflecting the expected second half softening in our earnings.

Our Engineered Papers segment produced a strong quarter despite the start of the anticipated LIP volume reversal and the RTL weakness. In total, our cigarette paper volumes including our Chinese joint venture, CTM, were up 5% in the first quarter, as strong growth in other cigarette paper products such as conventional cigarette paper and roll your own offset a moderate decline in volumes. We saw the LIP volume momentum from Q4 2015 and the first quarter of 2016 starting to reverse during the second quarter. As anticipated, our European LIP customers had (inaudible) of new packaging regulations and the retail channel is now working through high levels of (inaudible) inventory which we expect to continue in the near-term.

Our non-tobacco paper volumes showed strong growth driven by printing and writing products and we know that we have made some positive improvements in the typically low margin category. Second quarter recon volumes including the new Chinese joint venture, CTS, were down 12%. CTS was well below expectations and dragged down our total recon volume while our French recon mill is performing generally as anticipated.

Overall, CP segment performance was strong and continued enhancements to operations, cost structure and commercial organization are contributing to solid first-half performance and expanding margins despite the headwinds in RTL.

With respect to our Chinese paper joint venture, CTM, and our Chinese recon joint venture, CTS, the second quarter presented some new challenges and the impact of these developments are likely to proceed in the near-term.

First, in CTM, we had to switch energy sources from coal to gas on short notice to comply with environmental regulations. This resulted in a temporary factory shut down and [absorb] overhead and delayed shipments. While we expect to recover these volumes in the second half of the year we do expect an adverse profitability impact from the shift to gas though we will work diligently to find other cost offsets.

Regarding the overall Chinese cigarette market, 2015 saw a moderate 2% to 3% decline in smoking, a reversal on Europe's steady nationwide growth. Thus far in 2016, indications signal that the major cigarette producers are experiencing sales declines in the high single digits with all categories including premium being affected. We know this decline may not be indicative of smoking attrition rates as manufacture sales velocity is often driven by retail channel inventory management.

While the CTS joint venture was profitable in the second quarter, our expectation is for an accelerated ramp up and double-digit overall growth from EPS contribution on Chinese joint ventures will be a challenge for 2016.

Related to guidance given our year-to-date performance, these developments may well be offset by strength elsewhere in our business as well as a potentially less negative currency impact than we originally expected. It is never the less disappointing and we are taking actions alongside our joint venture partners designed to improve performance in a more challenging near-term environment.

On a positive note, recent reports on our multi-national customers continue to suggest that the OTM smoking attrition is flattish year to date which compares favorably to historical norms. In the US, indications are attrition was in the range of 1.5% year to date also favorable versus historical levels.

Regarding our 2016 EP segment priorities, we believe our share performance including LIP remains strong though as we mentioned last quarter, the inventory build and current build make it difficult to assess. We have no specific updates to our European LIP patent proceedings to disclose but are pleased with the progress so far this year.

As partly evidenced by our segment margin expansion, our operational improvements and cost controls continue to prove effective and we continue to evaluate further actions in response to market demands.

Now switching to AMS, perhaps the most important takeaway for the quarter was the stabilization of DelStar's topline after several quarters of elevated declines driven by weakness in the oil, gas and mining sectors, lumpiness of sales in our industrial channel as well as intentional sales reductions in certain low-margin industrial products.

For the second quarter, organic sales for AMS were down 1% and flat on a constant currency basis. Water filtration continues its steady growth and we saw improved activity from our filtration customers with supply into the oil, gas and mining channels. We have successfully gained profitable new business particularly in Asia to offset some of these customers who still remain at relatively low ordering levels.

In our industrial channel, the exit of several products continues to weigh on sales but has a less pronounced negative impact on our bottom-line and we intend to continue rationalizing our product set to sharpen our focus on high-value applications.

From a margin perspective, we saw steady improvements in recent quarters given the cost actions we have implemented and sales mix management that have become a focal point of the team.

Argotec delivered another solid quarter of top and bottom line growth and continues to perform well with key automotive surface protection products accounting for the highest growth rate across the portfolio.

Regarding execution of our 2016 strategic priorities, Argotec is on track to deliver expected accretion targets, AMS integration is progressing and we are taking action to improve DelStar's top line and margin performance as I just discussed. While we have faced some challenges in our base DelStar business some of which are beyond control with respect to certain end markets and volatility related to commodity prices, we are keenly focused on improving these areas within our control.

In an effort to accelerate these improvements we have brought a new (inaudible) team to run the operations of AMS. We believe our new EVP, Daniel Lister, can leverage his balanced background in operations, commercial and cultural leadership to lead us forward and capitalize on the opportunities to drive improved financial performance and deliver on synergy opportunities across our four acquired businesses.

I will now turn the call over to Allison.

Thank you, Frederic. I will now review the financial highlights from the second quarter.

Net sales grew 19.5% or 18.3% on a constant currency basis compared to the second quarter of 2015. The quarter benefited from strong cigarette paper and non-tobacco volume as Frederic detailed, the addition of Argotec and some modest currency benefits offset by lower recon volumes.

Second-quarter 2016 EP segment net sales were up 2.8% versus second quarter of 2015 and increased 0.9% on a constant currency basis. Recall that with the consolidation of the former engineered paper and recon segments in the fourth quarter of 2015, Engineered Papers now consists of all cigarette papers, non-tobacco papers and all of our reconstituted tobacco products.

Within the AMS segment, net sales were up significantly in the second quarter versus 2015. However excluding the effect of the Argotec acquisition, sales declined about 1% due to unfavorable currency movements, the improvement from recent results.

Consistent with strong recent trends in EP profitability, we saw good EP segment margin performance in the second quarter despite the decline in RTL as strong volumes in other papers, certain operational improvements and cost controls continue to bolster segment margins. Currency also provided a benefit as well.

The adjusted EP segment margin was up 250 basis points. EP segment GAAP operating profit margin benefited from the operational positive adjustments as well as lower restructuring costs. The AMS segment adjusted operating profit margin improved by 140 basis points and benefited from the Argotec acquisition. In addition, operational improvements within DelStar helped offset moderately higher resin prices.

Shifting to consolidated earnings, second-quarter 2016 GAAP EPS was $0.85, up from $0.80 in the prior year driven in part by lower restructuring costs which are excluded from our adjusted EPS. Adjusted EPS was $0.93, down from $0.97 in the second quarter of last year. The year-over-year comparison was significantly affected by nonoperating gains from the sale of water rights which were $0.09 per share in the second quarter of 2015 whereas no such gain was generated in the second quarter of this year.

In addition, as Frederic discussed, newly evolving dynamics in the Chinese tobacco industry are pressuring our JV's performance with a year-over-year decline of $0.07 from our JVs.

Lastly, the impact of currency translation was neutral to both GAAP and adjusted EPS. All told, given the strong operating performance of EP and currency translation year to date being slightly more favorable than we had expected, we see no reason to revisit our annual guidance at this point. Further, currency movements in the second half of this year could be subject to volatility surrounding geopolitical events.

Our effective tax rate for the second quarter of 2016 increased by 350 basis points versus the prior year quarter driven by a greater concentration of earnings in higher tax jurisdictions and one-time benefits in 2015 that are not repeating.

Year-to-date 2016 free cash flow was $42 million and trailing 12 month free cash flow was $115 million. While we do not provide free cash flow guidance, we would generally expect operating cash flow in 2016 to decline in proportion to our adjusted EPS. Further, as discussed in early February, our capital spending forecast remains approximately $30 million.

From a leverage perspective for the terms of our credit facility, we were at 2.2 times net debt to adjusted EBITDA and we have paid down our debt balance since the beginning of the year.

Now back to Frederic.

Thank you, Allison. Overall, we are performing consistently with our expectations thus far in 2016 and we continue driving both short-term and long-term initiatives to transform SWM from a tobacco driven paper company towards a more growth oriented, diversified, value-added industrial manufacturer.

Our Advanced Materials and Structural segment is well-positioned in several key growth areas specifically water filtration and surface protection to deliver solid long-term topline growth and propel that transition.

However, where we believe our management actions can make the most impact is an intense focus on AMS margins. We have already taken several steps to rationalize product lines and improve product quality and consistency. These activities are key to delivering meaningful multiyear margin expansion and when combined with benefits of increased scale and synergies across the more integrated operation, should drive total AMS profits higher and result in a more balanced split of our profit pool between our tobacco and non-tobacco businesses. We appreciate your continued interest and support.

That concludes our remarks. Please open the line for questions.

(Operator Instructions). Dan Jacome, Sidoti.

Good morning. It looks like you had a lot of strength on the non-tobacco paper side. Sorry if I missed it. Can you just give us a little bit more color of what you are seeing there and how you are looking at the trajectory for that in the next few quarters?

Sure. So the growth that you see and again, this is only a quarter-to-quarter comparison obviously, strong growth on non-tobacco paper this quarter, the growth came from I would say capacity filling activity in the printing and writing business and some packaging products made out of Brazil. We took advantage of a combination of pricing actions and product mix improvements to actually take a product that is low margin into a more profitable situation.

Okay, great. And then turning to the balance sheet if I'm not mistaken, it looks like you paid down a nice amount of debt. How are you thinking about further debt reduction activities?

Yes, Dan, so we continue to be optimistic about our ability to continue to pay down our debt throughout the course of the year. It will most likely not be at the same high level that you have seen year to date.

And is the plan to kind of delever to a reasonable level and then kind of build more dry powder for another acquisition or are you guys still thinking about this year as kind of reset and integrate everything you have already acquired in the last three years?

That is correct. I think the focus is integration of Argotec, (inaudible) synergy scale. We remain active as it relates to building a strong pipeline of potential acquisitions down the road but the focus is on integration and efficiencies.

Okay. I will get back in the queue.

(Operator Instructions). Julie Li, Drexel Hamilton.

Thank you for taking my question. Good morning. My first question is on AMS, I saw the segment revenue was up 77%. Of course the majority of that increase is from Argotec. But there is also improvement in DelStar. Can you share Mark color on that since when did you see improvement during the quarter?

Sure, Julie. So as we mentioned in the prepared remarks, we continue to see solid growth coming from our water filtration business and we have also seen a stabilization of our business with customers that are aligned with oil, gas, mining activities and we have been pleased with some good growth coming from our Asia operations across a variety of filtration applications.

The point that I want to emphasize is that we continue to prune our mix of industrial sales. As I mentioned, our focus this year is really to reposition DelStar on higher value applications and expand the profit margins as we are posting year to date.

And I saw there is a comment on AMS that says declines in industrial product. Can you share more color on that? What kind of decline is that? And I also noticed that yesterday one of your industrial filtration competitors mentioned in their earnings call that they had some headwinds from large power generation customers. Did you see the same kind of headwinds during the quarter?

So on the industrial products question, I think the reason we are pointing to some decline is again our focus on profitability and the fact we benefit from growth on the higher margin filtration businesses around the world is kind of helping us to improve the mix and expand margins that way.

As it relates to the exposure to the power segment, industry, our focus is really today on wind -- tailwind, blade manufacturers, there is some I would say timing of order issues that this industry presents and it is fairly concentrated. However for us, we are seeing steady activity there. Obviously we believe strongly that there is solid growth on selling those customers midterm.

My next question is on recon volume, how big impact was the Chinese JV volume decline? And do you see that as a long-term decline or rather short-term and could be recovered second half of this year?

We had a very tough comparison as it relates to CTS. The Chinese joint venture, last year second quarter was the strongest quarter of the year and so when we report the profits and decline in volume versus prior period in the second quarter, CTS was the largest driver of that volume decline even though the [French] operation were also down year on year.

And as it relates to CTS, there is typically is some timing of orders and continued lumpiness in one quarter to another and as a reflection of the weakness in 2016 in cigarettes being sold by our customers to the market and probably the result of some reduction in inventory of finished products within the wholesale and retail, [some in] the Chinese market, we expect growth from the quarter but certainly not at the level that we had built in the guidance which was double digit income benefit if you want from the joint ventures versus last year.

Thank you very much. My last question is on gross margin and operating margin. I saw some improvement in the gross margin, 66 basis points better than the second quarter 2015. I am wondering what is the cause behind that? Did you have better supply chain or was it mostly due to lower raw material costs?

So it is a combination of several factors. I would emphasize the strong performance of our Engineered Paper segments and the drivers being a combination of strong volumes, strong efficiencies within an execution of our plants, within our operations, we caution that we are excited to see the (inaudible) effect of our LIP offering and we believe that will continue in the second half of the year but I am very pleased with the execution of the segment, Engineered Papers overall.

As it relates to AMS, strong execution of Argotec to topline and bottom line and improved margins from DelStar are contributing to the gain in profit margins and that is expected to continue.

Thank you very much for the color. I will jump back in the queue.

Dan Jacome, Sidoti.

So I'm just trying to get my hands around the no change to guidance. I know there is a lot of puts and takes, it looks like Europe might be a tailwind now with attrition not as bad as you probably thought back in February. China JV near-term headwind, is it really coming down to kind of your optics into LIP and you feel you have a pretty good grasp around that? And then kind of the wildcard is just currency? Do I have that correct?

Yes, I think you summarized it well. Obviously currency is out of our control. I think right now we are seeing a very strong first half as it relates to the volumes. On the Engineered Papers side as we have said with the unbuild on the LIP question, it is really -- we believe we continue to gain incremental share. The question is how much of that incremental share gain equates at the end of the year which is what you said, the tailwind our business. And in terms of the challenge right now compared to our plan is essentially the weakness on the Chinese joint venture side which obviously we will continue to report on every quarter.

Okay, that is fair. Okay, thank you.

Julie Li, Drexel Hamilton.

Thank you very much. I had one follow-up question about the Chinese JV RTL volume. Was that, was there anything to do with regulation side or more serious competition from local competitors or potential another new competitor entering this landscape? Can you share more color on that? Thank you.

So just to address the last point, this is not due to I would say increased competition on the recon side in China. China was the only country of size where there was continued growth in smoking in China and that stopped last year with a small decline. We believe this decline continues and that is driven by anti-smoking regulations and excise tax increases that the government has put on cigarettes. However, this is smaller compared to the challenge that we are referencing with the volume decline and part of that is our cigarettes sales and part of that relates to excess inventory in the supply chain through retail of finished goods, finished cigarettes and for CTS particularly, we also are dealing with another line of excess lead supply which actually is probably more pronounced than what we see worldwide. A lot of that has to do with the fact that the industry was growing strongly and then it started to have an inflection point downward and under maybe the current state regulated system, the adjustments in terms of production outputs for cigarettes and also [crops and now for leaf], have been slow to be made and I think that is the challenge we are seeing this year is a reflection of that. I hope this addressed 0your question.

Thank you so much. I really appreciate the color.

I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Frederic Villoutreix for any further remarks.

Thank you all for attending the call. We certainly appreciate your interest in SWM. Allison, Mark and I will be in our offices today and if you have any further questions, please give us a call. We certainly look forward to updating you on our progress and results again in November. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.