Mativ Holdings Inc (MATV) 2017 Q1 法說會逐字稿

Welcome to SWM's First Quarter 2017 Earnings Conference Call.

Hosting the call today from SWM is Frédéric Villoutreix, Co-Chief Executive Officer.

He's joined by Jeff Kramer, Co-Chief Executive Officer; 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.

(Operator Instructions).

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

Sir, you may begin.

Thank you, James.

Good morning.

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

Thank you for joining us to discuss SWM's first quarter 2017 earnings results.

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 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.

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

Unless stated otherwise, financial and operational metric comparisons are to the prior year period and relate to continuing operations.

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

I'll now turn the call over to Frédéric.

Thank you, Mark, and good morning, everyone.

We are pleased to report a healthy start to the year with first quarter adjusted EPS of $0.66.

In terms of business fundamentals, AMS exhibited positive top and bottom line momentum in the base business and benefited from the Conwed acquisition.

These positive factors were offset by LIP and RTL volume challenges in the paper segment, which unfolded as anticipated and impacted sales and operating margins.

One isolated comparison item was a $0.04 gain in first quarter 2016 related to the sale of water rights.

We generated no such comparable gain in the first quarter of 2017.

Free cash flow in the first quarter, typically a low period for us, was minimal due in large part to timing of capital spending.

We still expect robust free cash flow for the full year, generally in line with the $100 million we generated in 2016.

For the first quarter, AMS net sales were up 41% overall and 3% excluding acquisitions.

As we noted in recent quarters, the inclusion of Argotec in reported organic sales growth was expected to push this metric back into positive territory.

Surface protection products, which are mainly sold into the transportation end markets, continue to perform very well.

These specialty sales are using automotive paint protection and glass lamination applications, both of which saw double-digit sales growth in the quarter.

Global channel developments and adoption progress has created positive momentum in our paint protection film business.

Although, this product line has relatively low penetration.

We estimate only about 5% in U.S. and even less overseas.

We see opportunity for strong sustained domestic and international growth.

Other key end markets were fairly mixed.

Filtration sales were flattish, while growth in industrial was offset by softness in medical.

Regarding the industrial end-market growth, we highlight that these sales grew overall despite continued deprioritization of certain low-margin sales.

Specialty sales for industrial customers performed well with new business gains in materials using clean-room inspection robotics and a strong increase in waste-containments applications.

The increases in our portfolio of high-performance films had positive mix impact from sales and margins.

While we don't report segment gross margins, we saw several hundred basis points of AMS gross margin expansion.

Conwed, which serves mostly the construction and infrastructure end markets, delivered growth and margins consistent with assumptions embedded in our accretion estimate.

[Cables and] control products led the way with double-digit growth, benefiting from continued strength in highway development.

We also progressed on early-stage synergy targets in SG&A and resin procurements, though we have only owned the business for a few months.

The recently implemented organizational integration should deliver strong savings on these 2 buckets for the remainder of 2017.

We also initiated the first major project under our footprint optimization plan with a planned consolidation of one legacy AMS facility.

This will be a phased approach with completion expected next year.

This is another critical step towards achieving our $10 million synergy growth by the end of 2018.

We intend to absorb the majority of the volume across other AMS sites, which we expect will increase capacity utilization of our best-performing plants and reduce fixed cost.

Such decisions are never easy, however, we expect this will unlock significant value for SWM.

The first quarter was -- also marked a significant milestone for AMS: it's first $100 million quarter of revenue, and we are on the path to be well over $400 million in segment sales this year.

This increased scale supports [reference] opportunities to optimize operations and expands segment margins.

One point on how we discuss AMS.

You will notice we are progressing a way on attributing performance to DelStar, the medical and air filtration bolt-ons, and Argotec.

Rather our comments are now geared to key applications and bold end markets we serve to provide a clear picture on segment growth drivers, including Conwed, AMS sales.

Obviously, it is fairly evenly across filtration, construction and infrastructure, transportation, and the combination of medical and industrial areas.

Switching to Engineered Papers.

First quarter saw a decline in sales and profits, as expected.

Segment volume was down 5%, driving a sales decrease of 7%.

Lower pricing and LIP royalties accounted for the remaining 2 points of sales decline.

Consistent with the factors we communicated in February but were incorporated into our 2017 outlook, the year-over-year LIP comparisons remained a headwind in the first quarter, given the elevated sales in the year-ago quarter.

The comparison not only impacted these high-margin sales, but the elevated production a year ago led to exceptional margin performance, where we expect the manufacturing efficiencies and other (inaudible) absorption in our plants.

While absolutely -- absolute sales levels at already normalized, their unusual comparisons to prior year are now behind us.

Adding to this already difficult comparison were certain operating efficiencies in several plants during the first quarter of 2017.

After the plant's year-end shutdowns, we experienced a small handful of line restock issues, which were a lag on operational performance during the first quarter.

These issues were addressed during the quarter.

They are no longer expected to impact segment margins.

Regarding RTL volumes, they declined as anticipated, and the full year outlook for a double-digit volume decline remains unchanged.

On a positive note, the strong sales of high-margin wrapper and binder recon products continues from last year, and we did not see a dropoff in the other patterns as we had expected.

Nontobacco paper volumes increased, though these clearer volumes had a limited impact on profitability.

Beginning this quarter and going forward, we are reporting consolidated segment volume and elaborating on performance of RTL and LIP, sales mix, price and other factors, such as royalties and currency (inaudible) throughout different style to sales performance.

Furthermore, our volume disclosure now only includes the EP reporting segments and will no longer include the Chinese joint venture.

This is intended to increase transparency of segment operating metrics and financials.

To set a baseline for their major product lines within Engineered Papers, of the $560 million in total 2016 segment sales, cigarette papers were approximately 65% with LIP accounting for more than half of a category.

Total reconstituted tobacco products were about 25% of segment sales with a large majority of those sales related to traditional RTL and the reminder -- remainder opportunity wrapper and binder.

Lastly, nontobacco paper comprised approximately 10% of segment sales.

Our investor deck will be updated to provide the sale speeds as well.

Regarding execution of our EP segment priorities, we remain actively focused on managing costs across our sites to match capacity with demand.

We have also largely completed the line verifications at the French mill for the production of specialty filtration paper.

In these early(inaudible) reduced risk tobacco products, the industry remains optimistic about consumer adoption.

Major cigarette manufacturers continue to provide productivity updates we have in test markets, new rollouts, capacity expansions and the general strategic importance of this innovative new product category.

We remain in close discussions with our primary strategic partner and are currently supplying reconstituted tobacco as the tobacco materials for their (inaudible) their product.

In addition, we think the competitive environment among the major cigarette companies is favorable for us as those manufacturers were not in the market with a product may be highly motivated to launch quickly.

We think our current technology and available capacity offer an attractive and expeditious option.

We look forward to providing more details later this year as we see results of more widespread market introductions, consumer reaction and updated 2018 forecasts from industry players.

I will now turn the call over to Allison.

Thank you, Frederic.

I'll now review our financial results, starting with segment performance.

In the first quarter, AMS net sales increased 41% to $100 million.

Organic sales grew 3%, and the Conwed acquisition drove the remainder of the growth.

GAAP operating profit was $8.9 million or 8.9% of sales.

Adjusted operating profit was $17.2 million or 17.2% of sales, up 470 basis points.

The margin expansion was largely driven by organic sales growth and favorable mix as mentioned.

Both the strength of surface protection products and exiting low-margin industrial sales provided mixed benefits versus Q1 of last year.

The addition of Conwed's high-margin operations also provided a solid lift to prior year's adjusted segment operating margin of 12.5%.

As did the realization of approximately $0.5 million of early-stage synergies.

The Engineered Papers segment's net sales were down 7%, driven mostly by volumes as well as pricing concessions and decreased royalties.

The adjusted operating margin was 20.6%, down 470 basis points due primarily to the previously discussed impact of lower LIP and RTL volumes and the associated impact on overhead absorption compared to last year as well as the manufacturing inefficiencies.

We expect EP segment adjusted operating margins to improve from the first quarter level and finish the year in the low 20% range.

Corporate unallocated expenses were up slightly to $9 million.

CEO transition expenses resulted in approximately $1 million incremental costs and offset declines in other areas.

On a consolidated basis, net sales increased 9% but decreased 4%, excluding Conwed.

Adjusted operating profits were nearly $36 million, down $1 million from the year-ago quarter.

The adjusted operating margin was 15.3%, down 170 basis points.

Currency movements were not impactful to consolidated sales and operating profits.

Regarding items excluded from adjusted operating profit, AMS segment noncash purchase accounting expenses more than doubled to nearly $8 million.

This increase was due to the added intangible asset amortization and onetime inventory step-up charges related to the Conwed acquisition.

In Engineered Papers, restructuring expenses decreased to $0.5 million from nearly $1 million a year ago.

Shifting to consolidated earnings.

First quarter 2017 GAAP EPS was $0.45, down from $0.69 in the prior year.

Adjusted EPS was $0.66, down from $0.80 in the prior and excludes restructuring and impairment charges and purchase accounting expenses.

As mentioned, a notable year-over-year comparison factor was a $0.04 gain in Q1 of 2016 from the sale of water rights, whereas, we had no comparable items this year.

In addition, we experienced an increase in our quarterly effective tax rate to 34.3%, driven by a higher proportion of earnings generated in the U.S., lower foreign tax credits, an increase in tax rates in certain geographies, and some discrete items.

As disclosed last quarter, the previously low tax rate for our LIP printing facility in Poland increased significantly due to a change in tax regulations.

After the discrete items, the first quarter 2017 effective tax rate would have been 32%.

The impact of currency translation was negative $0.01 to both GAAP and adjusted EPS in the first quarter.

While first quarter earnings were lower versus last year, we note that first quarter adjusted EPS of $0.66 was basically in line with our expectations.

In the context of our full year adjusted EPS guidance of $3.15, this would imply the combined EPS for the remaining 3 quarters would be stable compared with last year's result.

Over the course of the year, we expect continued organic sales growth and margin expansion in AMS, continued Conwed integration and synergy realization, LIP comparisons to become more favorable, continued RTL declines, and a pickup in paper segment margins compared to the first quarter.

First quarter 2017 free cash flow was essentially neutral.

Historically, first quarter is a seasonally low cash-flow period.

Compounding the seasonal factors was anticipated higher investments in growth-related CapEx.

We called out we began upgrading the paper line in 2016 to produce new specialty filtration paper, and we're pleased to report the project is now largely complete.

This project contributed to total capital spending of about $12 million this quarter versus only $5 million last year.

We expect stronger free cash flow through the remainder of the year.

From a leverage perspective, per the terms of our credit facility, we were at 3.2x net debt to adjusted EBITDA at the end of the first quarter, up from 2x at the year-end 2016, driven by the increase in debt with the closing of the Conwed acquisition in January.

As communicated at the time we announced the Conwed acquisition, we expect to return to the mid-2x range by the end of 2018.

Now back to Frédéric.

Thank you, Allison.

Before we conclude the call, I would like to introduce Jeff Kramer, who as of tomorrow, will assume the role of sole CEO.

Since informing the board of my decision to retire from SWM, it has been a true team effort to find the right executive to lead the next phase of SWM strategic transformation, and we are highly confident we arrived at the ideal successor.

Jeff's combination of leadership style, technical expertise and market exposure and global experience will serve him well, and over the quarter, the next several quarters of getting to know him, I believe you will all reach the same conclusion.

Thank you, Frédéric.

Joining SWM at this juncture is such a unique opportunity with exciting developments across both of our businesses.

This is also an ideal time for transition giving the clear execution plan for the next 12 to 18 months.

With our operating priorities in place, I look forward to spending the next several months assessing our global capabilities, meeting our employees and learning more about our customers, products and operations across both segments.

Despite the significant changes at SWM with the creation of the AMS growth platform, the story is far from complete.

Integration and execution on the tangible opportunities within reach today is clearly the immediate focus.

However, our sights remain on continued evolution of the business to drive sustainable long-term growth.

In closing, I would like to express my most sincere gratitude for the opportunity to lead SWM over the past 11-plus years.

It has been a great pleasure to work with our employees around the world, support our loyal customers, collaborate with my fellow senior management team and board members and share the SWM story with the investment community.

We appreciate your continued interest and support.

That concludes our remarks.

James, please open the line for questions.

(Operator Instructions) And your first question comes from the line of Zhuoli Li from Drexel Hamilton.

My first question is on Argotec.

Could you provide some update about that part of business, the paint protection business?

Any color on the ordering activity and market trends is appreciated.

Sure.

As we reported in our prepared remarks, the film for the transportation end market had a very strong performance.

That's a combination of continued progress from the U.S. market, well, penetration rate is still in the 5% level.

But we are also seeing a lot of momentum in taking our technology to other markets overseas and other channels of distribution, like the window tinting business and with great success in Asia.

So we are very bullish about the outlook for not only the balance of the year but also years to come due to the fact that our penetration rate is still extremely low and the market that we are tapping in, especially in Asia, are very large.

Okay.

And how about the integration of Conwed and also for oil, gas E&P customers.

Do you have any update on that business trend?

Sure.

So the integration of Conwed is going very well.

It's 106 days into the process.

As we have reported, we have now realigned our organization, integrated from an organization point of view Conwed into AMS.

As a result of that, we're starting to generate some tangible SG&A cost improvements.

We have completed the study of how to optimize the manufacturing footprint in the U.S., and I've initiated the free stage closure of our facility in Texas and moving production to other sites in the U.S., which will be the lion's share of the $10 million of synergy growth that we announced.

So -- and we also are moving forward to one brand, that's a global brand for AMS with very good reception by our key customers.

So everything is progressing well.

Still a lot of work ahead but good momentum as we are getting into the second quarter.

As it relates to oil and gas, all revenue that's starting to bounce back from lower -- over a year ago, and we're also optimistic that we should see continued recovery in the quarters to come.

That's great color, Frédéric.

My next question is on the EP side.

I was expecting a double-digit decline during the quarter, but actually, we see the results were better.

Why -- what's your opinion on this?

And should we expect better performance in EP going forward?

And are you trying to be conservative on the guidance by your reaffirming the guidance?

Looking at -- from our viewpoint, we performed at the level expected in terms of revenue performance.

We -- a little disappointed by the profit margin achievement as we explained essentially due to these inefficiencies with restarting a few machines.

Now the problem is behind us, and we had a very strong comparison a year ago in terms of the mix and the volume of activity in our plants.

When I look at the RTL, to say, I think our plans stays in line with what we guided.

In February, there is some beginning of some momentum with the Heat-not-Burn revenue, and we're also continuing to see a good quarter from the wrapper and binder side.

So there are smaller elements of the business that are moving in the right direction.

But we have to be cautious because they're still small and wait for, I would say, 2 or 3 quarter to have a better view of 2018.

As I indicated, as it relates to Heat-not-Burn, I see the end of the year as a critical time to assess the effect -- the positive effect that this new product line will have on our RTL segment.

Zhuoli, does that address your question?

(Operator Instructions) Your next question comes from the line of Dan Jacome from Sidoti.

I appreciate the time.

Let's just stay on the Heat-not-Burn, actually, because that it was -- you didn't have it in the last press release.

You did put in this one, which is encouraging, and it looks like that could be a pretty large addressable market for you guys.

So I just want to know exactly what gives you more confidence now versus, say, February were you're putting it in the press release.

I'm assuming it's just a lot of your customers are already playing in this part of the industry.

Or did you have conversations with them?

Or what can you tell us about that?

Sure.

And what I'm going to share with you is public information as reported by our customers.

Japan, as you may recall, has been the first market or country where PMI has introduced their Heat-not-Burn product.

After a year-and-change, they have now achieved a 10% market share, which is obviously very large and exceeded their goals.

They are adding capacity as a result of not only the success in Japan but also in production to many other markets.

They mentioned 200 markets around the world where they are testing and introducing Heat-not-Burn.

And just to give an idea, their capacity expansion from 15 billion stick units produced in December of '16, they're targeting 100 billion, so a sevenfold increase in -- by the end of '18.

So it's an exponential curve.

And the other customers are following suit, and BAT has introduced in Japan in as -- in one region of Japan achieving a 6% market share, so 10% for PMI, 6% for BAT gives you the idea of the potential.

And we are starting to -- we are in commercial mode today.

The production is expected to increase sharply by the end of the year.

The question we -- for us -- and what I was referring to is in light of the attrition of the conventional RTL business, we need the certain size of volume for Heat-not-Burn to more than offset now that attrition.

And my sense is by the end of the year and looking at the projections from the customers to continue to introduce Heat-not-Burn around the world, we have a good sense of what impact Heat-not-Burn will have on our franchise for the years to come and starting with -- communicate it at that point.

Great.

And it's still -- the idea is still that it uses a lot more RTL?

Correct.

Okay.

Now I'm going to turn over to AMS, obviously nice job on the margin expansion.

But I see in the press release you closed the plant, just wondering as we -- going for -- are there others to close, and then what typically is -- how long does it take before you can get the capacity in the closing plant to get absorbed by another one?

Yes.

So the -- think about our plan as a 3-phase downsizing and incremental production transfer to other sites.

That would be completed in the second half of 2018.

So it's an 18-month process.

Three phases, so -- and the transfer will tap on existing capacity at the other sites, but also we are relocating and upgrading production lines.

So net benefit is that we are moving the business to lower-cost production centers and, obviously, making a step-change in reducing the total overhead for production in the U.S. So it's a very rational plan that we are following and very confident in starting to see the first benefits of this plan in the latter part of this year.

Okay.

That's helpful.

And then I wanted to turn it over to capital structure, just real quick question.

Obviously, the debt is up, acquisition driven.

When you did the Conwed deal in December, you kind of provided us with some sort of time line of where you wanted to get leverage ratio back to in a certain number of months or maybe it was quarters?

Can you just give us an update on that?

Are you still sticking to the plan that you provided then?

Yes, Dan.

What we mentioned previously is that we see ourselves in a position to exit 2018 in the mid-2x net EBITDA range, and so we very much see ourselves tracking to that early days.

2.5x by mid-2018?

By end of 2018.

By the end of 2018, so okay.

I just wanted to double check that.

(Operator Instructions).

And you have a question again from the line of Dan Jacome from Sidoti.

I thought I'd follow up.

Just to, Dr. Kramer, look forward to working with you, and obviously welcome just very high-level questions just on this call, but I'm interested in your background, and given the chemicals and the petro and then tying that into the resin-heavy businesses that SWM has been (inaudible) over the last couple years.

Just wondering, I don't know if you can't maybe provide us with a little bit on your background and how you think that might dovetail nicely to what SWM and the portfolio that the company has been building over the last couple years, if possible, but I understand if you can't speak on this call.

No, I'd be happy to.

And first of all, thank you for the kind words.

I look forward to working closely with you as well.

I'll try to give you a brief background.

So I'm an engineer by training, and I've had numerous technical and business leadership roles throughout my career.

I've led global businesses that have manufactured products for use in paper manufacturing, nonwoven manufacturing, polyurethanes, and so I've had previous experience in those markets as well as experience in the oil and gas industries.

I've also spent about half my career living overseas both in Europe and Asia.

So I have on-the-ground experience growing businesses in international geographies, which will represent good growth opportunities for us.

And then finally, I've had executive positions involving leadership in both strategy development, mergers and acquisitions, and I've led successful acquisitions and integration activities all around the world.

So when I step back, I think my background will greatly complement the already-strong leadership we have here at SWM.

And I'm really looking forward to the opportunity to make a contribution to work with the team to grow the company going forward.

And there are no further questions at this time.

I turn the call back over to the presenters.

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

We certainly appreciate your interest in SWM.

Jeff, Allison, Mark and I will be in our offices today, and if you have any follow-up questions, please give us a call.

Have a nice day.

This concludes today's conference.

You may now disconnect.