Mativ Holdings Inc (MATV) 2018 Q1 法說會逐字稿

Welcome to SWM's First Quarter 2018 Earnings Conference Call.

Hosting the call today from SWM is Dr. Jeff Kramer, Chief Executive Officer.

He is joined by Andrew Wamser, 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, Ezra.

Good morning.

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

Thank you for joining us to discuss SWM's first quarter 2018 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.

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

I'll now turn the call over to Jeff.

Thank you, Mark, and good morning, everyone.

Yesterday, we reported first quarter results with sales up 12% to more than $260 million, and adjusted EPS up 24% to $0.82 a share.

It was a good start to the year with consolidated sales, operating profit, EBITDA, free cash flow and EPS all up versus last year.

As we've discussed, our 2018 operating plan was based on relative stability in our paper business and improved organic sales growth in AMS, and we delivered on both fronts.

For the quarter, the key takeaways are strong manufacturing performance and favorable currency driving top and bottom line growth in EP, and accelerated organic sales growth in AMS, offset by short-term margin pressures, which we expect to improve throughout the year.

Cash flow was up significantly versus last year, albeit in our seasonally lowest quarter.

And as we indicated on our last call, we project free cash flow to exceed $100 million in 2018.

AMS delivered 7% organic sales growth with solid gains across most of our portfolio.

Transportation, filtration, industrial and medical all showed strong increases, while infrastructure and construction lagged.

Going into more detail, our transportation business delivered strong results in the heels of a soft fourth quarter.

Recall that after a high growth in mid-2017, our customers paired back inventories significantly impacting Q4 results.

We indicated that this was expected to be a short-term issue and, in fact, these sales bounced back and resumed their growth trend to start the year.

While the quarterly comparisons may be lumpy, our healthy order backlog for these specialty films supports a positive outlook.

In our filtration business, we are pleased to see a rebound in water filtration sales as the general market lull over the past 18 to 24 months had consistently hindered AMS growth.

As anticipated, we see the beginnings of a 2018 upturn as the filter replenishment cycle returns and customers plan for new capacity coming online in the Middle East.

We also saw a continued growth in process filtration, driven mainly by gains in semiconductor manufacturing where our products filter the liquid solvents used in chip reduction.

In our infrastructure and construction business, we were affected by extended and severe winter conditions across most of the northern parts of the country during the first quarter.

While we don't like to use weather as an excuse, this market is highly sensitive to poor conditions as it impacts construction crews' ability to complete projects.

Simply put, many of the end users of our erosion control blankets and sediment control socks have been unable to perform installations at their sites.

We believe a portion of these delayed sales will be recovered throughout the remainder of the year.

Unfortunately, we did not experience the entire flowthrough of higher organic sales to the bottom line.

As anticipated, our Austin site incurred elevated costs as we get closer to a final exit later this year.

We flushed through high-cost inventory, incurred accelerated depreciation on several assets, and endured the typical inefficiencies related to closing a plant resulting in P&L impacts.

The higher costs associated with this site accounted for the majority of the adjusted segment margin decline.

However, we expect to offset these costs later this year when we realize the synergy from closing this facility, which annualize to a majority of our $10 million run rate target.

The second issue is higher resin costs, particularly polypropylene which is up versus last year and is forecasted to remain elevated in 2018.

In response, we recently implemented price increases to our customers.

The increases are intended to mitigate higher resin prices, and we have seen many resin users announce similar actions.

The price increase will benefit the coming quarters, and we anticipate it will offset a large portion of the cost pressure.

All told, we are encouraged by the sales momentum despite the margin impact of these short-term issues, and are confident our actions will result in better profitability for the year.

Finally, our key strategic projects are progressing well, as the new facility in China is up and running, and we are hitting internal milestones for our new European film line startup later this year.

Switching to Engineered Papers.

First quarter results were solid.

Segment volume was up 2%, largely due to growth in non-tobacco papers as total tobacco volume was stable.

Currency, particularly the euro drove the majority of the 10% sales increase in the quarter.

Regarding segment margins, we reported healthy growth versus last year.

Note, however, that first quarter 2017 results were suppressed due to production issues related to several line restarts.

Favorable comparisons aside, we performed well in the quarter from a manufacturing perspective, with productivity gains offsetting higher pulp costs.

In response to this inflationary pressure, we have also selectively raised prices and will continue to monitor the pulp market and evaluate further actions.

Regarding our strategic priorities, Heat-not-Burn sales were up significantly over last year.

At that time, we had just begun to generate commercial sales as our initial major customer ramped up production and built inventories.

We expect continued growth in 2018, and have begun shipping initial commercial quantities to a second major customer who is preparing to launch their product.

We acknowledge that there has been some volatility on The Street regarding category growth reflected in earnings reports of key industry players.

We have been consistent in stating that Heat-not-Burn is an attractive long-term play but is still in the early phases of rollout, and will experience some fits and starts as it gains acceptance.

We remain optimistic on the long-term outlook for this innovative product line, and see this more as an offset to secular declines in demand for our other tobacco-related products rather than a game changer in the near-term.

I'd also like to highlight a positive legal result in our LIP business resulting in a onetime settlement of $1.2 million from our competitor.

While relatively small, it signals the strength and defensibility of our patent portfolio.

We note this is not our primary infringement case, where we received a favorable ruling in late 2017.

As stated previously with regard to that case, we are assessing potential positive outcomes, but there is no update to provide now.

I will now turn the call over to Andy.

Thank you, Jeff.

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

In the first quarter, AMS net sales increased 15% to $115 million, with pro forma organic sales growth of 7%.

As Conwed was acquired mid-January 2017, the 2018 first quarter had 3 additional weeks of Conwed contribution.

Adjusted operating profit was $16.2 million or 14.1% of sales, down 310 basis points.

The margin contraction was primarily driven by the inefficiencies of our Austin plant, as Jeff detailed earlier, which is scheduled for closure later this year.

As part of this process, we are incurring accelerated depreciation expenses and realizing the lower margins of inefficiently manufactured product that are flown through the P&L.

These anticipated expenses account for more than 2/3 of the 310 basis point margin decline.

The second primary driver was higher resin costs, which impacted margins by more than 100 basis points.

In addition, recent investment in our new Chinese facility and the acquired Conwed operations resulted in higher depreciation equating to another 50 basis points.

Looking forward, however, we believe the price increases to customers beginning in the second quarter will provide an offset to higher resin costs.

And annualized synergies from the Austin site closure in the second half of the year will exceed these short-term pressures.

The Engineered Papers segment net sales were up 10% on a 2% increase in volume.

Foreign currency movement provided an 8% benefit to the top line.

Assuming current exchange rates hold, the favorable comparisons would be more muted in the second half of the year.

The adjusted operating margin was 23.1%, up 180 basis points, due primarily to stronger manufacturing performance in the soft year-ago quarter, which offset higher pulp costs.

Of note, while currency did provide a boost to operating profit, it had no impact on the operating margin expansion.

Adjusted corporate unallocated expenses increased by 6%.

But as a percent of total SWM sales, it declined approximately 30 basis points to 3.6%.

On a consolidated basis, net sales increased 12%, or were up 9% pro forma for Conwed, and up 4% pro forma for Conwed and excluding currency.

Adjusted operating profit was $40.6 million, up 11%, and adjusted EBITDA was $50.7 million, up 13%.

The increase in accelerated depreciation and depreciation on new assets contributed to EBITDA growth exceeding operating profit growth.

Shifting to consolidated earnings.

First quarter 2018 GAAP EPS was $0.68, up from $0.45 in the prior year.

Adjusted EPS was $0.82, up from $0.66, representing 24% growth.

While EPS growth was supported by growth in operating profits, we also benefited from a lower tax rate.

Our first quarter tax rate was 25.6%, down from 34.3% last year when we had higher discrete tax items.

The primary driver of the lower tax rate was changes to the U.S. tax code.

We caution that while this current rate is very favorable compared to 2017, there could be variability in our quarterly rate as we continue to assess and interpret the new tax laws.

Currency translation was a positive $0.03 impact to first quarter EPS.

I'd like to take a moment to discuss an accounting change and its impact on our financials.

Due to new accounting guidelines, a portion of pension-related expenses, we previously recognized as operations, have now moved below the operating line into other income and expenses.

The change does not have -- does not affect net income or earnings per share measures.

We estimate the total reclass for 2018 to be about $3 million, with the vast majority relating to our Paper segment.

The results in our release reflect this change to the current and prior periods, and the updated investor presentation on our website reflects those changes on a quarterly basis for 2016 and 2017.

In addition, we've modified our calculation of adjusted EBITDA to exclude our JVs and other income and expenses, which fall below operating income.

The result essentially equates to operating profit plus D&A, conforming to the methodology, we believe, investors typically calculate when assessing our business.

Moving to cash flow and liquidity.

First quarter 2018 free cash flow was $16 million.

This was a substantial improvement from prior year, driven by higher income and lower CapEx.

CapEx was about $6 million in the quarter, which annualizes well below our $40 million guidance, but we anticipate spending will pick up toward the anticipated range as the year progresses.

From a leverage perspective, for the terms of our credit facility, we were at 2.9x net debt-to-adjusted EBITDA at the end of the first quarter, down slightly from year-end 2017.

As we previously noted, absent acquisitions, we expect that our leverage ratio will move lower as we generate free cash flow and deliver expected EBITDA growth in 2018.

Now back to Jeff.

Thanks, Andy.

To wrap up, first quarter was positive overall.

Sales grew in both segments, with particular strength in some key AMS markets.

Margins were good in Paper.

We claimed a small success in LIP litigation and currency impacts were both favorable versus last year.

Clearly, we like to see more of the AMS sales growth drop to the bottom line, but we expect significant profitability improvement in the coming quarters, given the actions we've taken on price and projected synergy delivery from the site closure.

As we've consistently said, we are focusing on executing our 2018 synergy plan and supporting several growth initiatives across growth businesses.

We also remain active in assessing additional M&A opportunities.

While nontobacco sales at 50% was an important milestone, it is not our destination, and we will continue pursuing additional strategic actions to support long-term growth.

We appreciate your continued interest and support.

And that concludes our remarks.

Ezra, please open the line for questions.

(Operator Instructions) And our first question comes from the line of Dan Jacome from Sidoti & Company.

So a couple questions.

First, on the AMS segment.

Encouraged to see that the water filtration business picked up.

I'm just curious, how long -- if I want to call this a bullish cycle, how long do you expect this to last?

Is this something that you foresee could be a few quarters?

Or we're now at an inflection point based on industry history and so forth that this could last several years?

Yes.

So as you recall, our reverse osmosis water business is following the megatrends of the need for increased freshwater.

So we're generally positive and bullish on the segment overall.

And growth is driven by 2 primary methods: One is replenishment of equipment that is typically installed and it’s typically a 5-year cycle; and then the installation and development of new large-scale reverse osmosis plants.

We have been discussing over the last several quarters that the replenishment cycle had been expanded longer than we had thought it would be, and that was really of a trade-off between efficiency and energy costs.

And with the suppressed energy costs over the last recent years, a lot of these installed plants have been able to extend their replenishment cycle.

What we're starting to see, and we've been hoping to see over the last couple of quarters, is that replenishment cycles seems to be picking up.

It's like maintenance in any industrial plants, you can probably delay it for a little while, but you can't delay it forever.

And so we're starting to see the early signs of that replenishment cycle and we're encouraged by that.

We're also starting to see the announcement of new reverse osmosis plants.

I know people are signing deals in the Middle East, and I think there are things happening in Asia as well.

That's a longer cycle.

It takes a couple of years to build those from signing, but we're encouraged by that.

So long-term, we think this is a positive trend.

We think the replenishment cycle seems to be picking up.

It's just the first quarter of that, so I want to be a little bit cautious, but our team is encouraged by what they're seeing.

All right.

Good.

That helps.

On the medical, I think, you noted some strength there.

Can you detail that a little further?

What sort of products and maybe buckets in medical are you seeing the most upside?

Yes.

A lot of that growth came in our finger bandage division.

We're the market leader in supplying materials to that.

There were a couple of new products that were introduced, and we saw just some general strength along the category.

The rest of the marketplace was up as well.

It's a smaller category for us, but one that is profitable, and we're encouraged by what we see there as well.

Okay.

Last one and then I'll get back on the queue.

Resin cost, still inflationary.

Is there any industry chatter about what they may look like next year?

I know you don't have a crystal ball, but you mentioned in your commentary -- no, you mentioned in your commentary, '18 headwind continues, but is there any line of sight on '19?

Yes.

So as you can imagine, we're spending a lot of time trying to understand what things are happening because the forecast for polypropylene has changed a couple of times over the last quarter or 2. We had originally expected polypropylene prices to peak this first quarter and start their downward trend.

We're still seeing, we're expecting some, but we're not expecting it to fall greatly.

I believe there will be some capacity coming on in the future towards the end of '19 that might impact the supply/demand balance.

But we try to be a little bit cautious in trying to forecast that marketplace.

And so we're really concentrated on '18, which means we think polypropylene prices will remain elevated.

But we've also taken pricing actions to account for that.

Interesting.

Is that resin capacity expected to -- is that going to be in the North America market or somewhere else?

You are probably speaking to the wrong person to give you the details on polypropylene.

I would rather you go to the closer experts.

And our next question comes from the line of Kurt Yinger from D. A. Davidson.

Just starting off I wanted to sort of return to the water filtration.

So it sounds to me like you're seeing the benefits of the replacement cycle now.

And then you're also maybe a bit more confident about new installations benefiting the out-years.

Is that sort of the correct way to think about it?

Yes.

I think that's how you would characterize my comments.

Again, I just want to be cautious.

We've thought we'd see the pick up earlier.

And so we'd like to see a couple more quarters go through the replenishment cycle to make sure it really is an uptick.

But again, as you can imagine, it's a very important segment for us and our team is spending a lot of time with our customers, and they are giving us information that says they see the replenishment cycle picking up, and they're seeing new increase in order or potential orders with new desalinization plants, and so we find that to be encouraging.

Okay, great.

And then can you talk about which products on the paper side are sort of subject to the price increases with the pulp inflation we've seen?

Yes.

It would be any of our paper-related products or cigarette papers, even our non-cigarette paper materials.

It's pretty across the board.

We originally expected elevated pulp prices during the year, and we had forecasted for that.

What we're seeing though is pulp pricing is going up higher even than we had originally expected.

I think we're not the only ones experiencing that.

It's across the industry, and it might be related to some actions that occurred in China and so we're continuing to look at that.

We have selectively raised prices, and we're continuing to monitor that to situation.

The good news is, we have a very extensive operational excellence program.

It was -- we had good manufacturing performance and that helped us also offset some of the cost pressures we were seeing.

Okay, yes.

I mean, you definitely aren't the only one.

No.

I can see that.

And then can you talk a bit about the initial feedback on some of the AMS price increases?

As I understand it, you really operate in some small markets where you control sort of significant shares.

So how do you think about sort of balancing that with the ability to raise prices and protect margins?

Yes, two things.

One is, I think it's globally recognized that polypropylene pricing is elevated, and I think that helps in the discussions.

It doesn't look like we're trying to do something that's untoward.

We also have very long relationships with a lot of our customers.

And we are a value-added play, so we're not a commodity player.

So it's the same thing for our customers.

When no one likes a price increase, it isn't the most material cost impact to them.

And so in general, we've seen acceptance of the price increases based on, again, good relationships and the importance of understanding where things stand.

Okay.

And should that sort of phase in over the next several quarters?

Or is it more immediate to where we'd start to see things really pick back up on the margin side in the second quarter?

Yes, we should start seeing it flow through in the second quarter.

We announced the price increase in the first quarter, and it's usually delayed to get through the whole thing, but we're seeing that, and you should see it in our second quarter results.

Okay.

And then can you talk about sort of the quarter and the results relative to your own expectations and sort of guidance for the year?

Are there some puts and takes with, perhaps, the strong sales growth but margin pressures at the same time?

Yes, actually, I think, the quarter unfolded fairly closely to what we expected with the caveat about resin costs on both side of the house.

And so the actions that we're taking on AMS and the margin compression that we're seeing there didn't surprise us.

I mean, we knew the actions that we're taking and the way we put our operating plan together.

We know when the closure flows through and those synergies start to develop.

On the paper side, volumes were about where we expected them to be.

The operating performance was about where we expect it to be.

It was really the pulp costs, the continued rise in the first quarter which were the surprise.

So we're pretty much on plan for the first quarter as we see it.

Okay.

And then two more quick ones.

Can you maybe quantify some of the costs that hit the quarter associated with the Texas facility transition?

Sure.

So when you think about the AMS margin compression when we went down 310 basis points, about 200 basis points of that is related to the Austin move.

So some of that was, as Jeff talked about in his statement, going through yet higher-cost inventory running through the system and then running through the P&L.

So that was about 200 basis points of it.

And then as we talked about, we do expect that, that facility could close later this year.

And so we're looking forward to those synergies running through our system.

Okay, helpful.

And then lastly, can you talk a bit about how you're feeling about the balance sheet here, sort of under 3x levered?

And any update from M&A pipeline?

Sure.

So balance sheet first.

I would say with regards to leverage, you did see us tick down from 3x on a net debt-to-adjusted basis to be down to 2.9x here this quarter.

I think absent any M&A activity this year with the expectation of our free cash flow forecast for the year and, obviously, our dividends, we would expect to delever them throughout the year.

With regard to M&A activity, I would say, we always continuously are looking at things, but our priority for the last year, in particular, has really been on integration making sure that the Conwed business is integrated, and we're getting all the efficiencies that we can and that -- and Austin is obviously a key part of that as we think about this.

But we are continuing to always evaluate new opportunities, but it's always a balance between making sure it's the right technology and the right end market and the right value.

So I would say we're active.

And speakers, I'm not showing any questions at this time.

I would like to turn the call back over to management for any remarks.

So again, I just want to summarize.

We had a solid first quarter.

We appreciate all the support we're getting out in the investor community, and we're happy to answer additional questions.

So feel free to contact us if you have any questions from the comments or the report.

Thank you.

Thank you.

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

This does conclude the program, and you may all disconnect.

Everyone, have a nice day.