Mativ Holdings Inc (MATV) 2020 Q4 法說會逐字稿

Welcome to SWM's Fourth Quarter and Full Year 2020 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, Janica.

Good morning.

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

And thank you for joining us to discuss SWM's Fourth Quarter and Full Year 2020 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 annual report on Form 10-K and our quarterly reports on Form 10-Q.

In particular, the extent to which the COVID-19 pandemic continues to impact our business is uncertain and depends on numerous evolving factors, which are difficult to predict, including the duration and scope of the pandemic and of actions taken in response to it.

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.

As you may have already seen in our financial results pre-released last week, SWM delivered a strong 2020 despite many challenges and uncertainties, demonstrating the strength and resilience of our global portfolio.

We are equally encouraged by the positive momentum we are carrying into 2021.

Before we get into details, I'd like to again express the heartfelt appreciation of the SWM executives and the entire Board of Directors for the incredible efforts our global teams continue to put forth.

Our results and achievements this year would not be possible without their remarkable commitment to each other's safety and outstanding service to our customers.

Fourth quarter results capped off a very good year for SWM with respect to our financial results and overall health of the business.

We do not use the term resilient lightly when we describe our results and believe our diversified and balanced portfolio served us well this year.

Our EP business had an exceptional year with demand unaffected by the pandemic and its related economic uncertainties.

While AMS bounced back quickly for mid-year softness in some areas, delivering outstanding organic sales growth of 21% in the fourth quarter.

Bottom line for the year, both AMS and EP grew adjusted operating profits.

We grew adjusted EPS 4% to $3.68 and free cash flow increased to $128 million, all while we continue to delever the balance sheet.

I would also note that while in abundance of caution, we withdrew our annual adjusted EPS guidance at the outset of the pandemic.

At the time, we communicated our conviction regarding the expected resilience of the business.

Ultimately, as shown today, we delivered within that original range.

Further, in late January, we announced an offer to acquire Scapa Group, a best-in-class innovation, design and manufacturing solutions provider for health care and industrial markets.

Scapa is expected to significantly increase our capabilities and propel us towards $1.5 billion of annual sales with an enhanced growth profile.

We expect to close the transaction during our second quarter and look forward to providing further updates after completion.

For AMS, overall sales increased double digits for the year with the addition of Tekra and despite a challenging backdrop, organic sales declined a small 2%.

We believe this demonstrates the resilience of our diverse end markets and the specialty applications, which many of our key products support.

Breaking down our organic sales for all of 2020 by market.

Medical sales continue to lead the portfolio with strength in face mask materials and specialty hospital products.

Filtration sales increased led by the air subsegment and industrial sales increased with gains in packaging and green energy products.

Infrastructure and construction and transportation both finished lower for the year, but we were pleased to see each of them rebound in the fourth quarter.

I'd also like to highlight that excluding transportation, which was our most COVID-impacted end market, organic sales would have actually increased for the year.

Specifically for the fourth quarter, organic growth was 21%, and we were especially pleased with the resurgence of our transportation film sales following some choppiness earlier this year.

We had signaled during our third quarter call that we were seeing signs of global improvement, and our optimism was justified as those sales grew materially versus last year's fourth quarter.

We continue to expect very strong sales in this market for several quarters as we get back to normalized levels.

Double-digit filtration growth was another key driver for the strong organic sales growth with gains across our water, process and air subsegments.

Resilience across the portfolio coupled with good cost performance and the Tekra acquisition contributed to our ability to grow AMS segment profits by 6% for the full year.

Looking back, we were very encouraged that our various end markets performed generally as we had expected, and we exit 2020 with good momentum and increased confidence that our balanced portfolio and robust supply chain are well positioned over the long-term to withstand periodic economic challenges.

Switching to Engineered Papers.

The segment wrapped up a banner 2020 with solid execution in the fourth quarter.

During the quarter, we also successfully closed the Spotswood facility, transitioning those volumes to other sites while maintaining high levels of customer service across the business.

For the year, volumes decreased 3%, a rate consistent with our expectations given global industry attrition and a continued de-emphasis on lower-margin products.

That said, we still delivered another year of positive price/mix shifts as Heat-not-Burn grew and our portfolio continued to shift toward our higher-value product lines.

More importantly, however, segment profits had a notable jump from recent years.

We note that we had been running in the low to mid $120 million range for EP operating profits from 2017 through 2019, but increased 8% or about $10 million in 2020.

Much of this was the previously discussed inventory builds that benefited our third quarter but we also saw great execution throughout the year and benefited from favorable input costs.

2020 will be difficult to repeat.

But we are pleased to have such strong segment performance and associated cash flows during an uncertain year.

All told, despite some temporary site shutdowns early in the year, we were flexible and agile in responding to our customers' needs, earning our reputation as a trusted strategic supplier to our paper customers.

With that, I'll turn the call over to Andy.

Thank you, Jeff.

Consistent with Jeff's comments, I'll focus mostly on the full year results and trends and also highlight key fourth quarter takeaways.

Beginning with our segments.

AMS sales increased 14% for the year and were down only 2%, excluding the Tekra acquisition.

Tekra contributed $77 million of sales for the year; and recall, we closed the transaction late in the first quarter.

The 2% organic sales decline was largely driven by the decrease in aftermarket transportation films, while the remainder of the portfolio actually increased 1%.

As Jeff referenced, AMS organic sales for the fourth quarter was a very strong and increased 21% with transportation sales increasing over 70% from the prior year quarter, driving the growth.

However, even excluding that strong increase in transportation films, our other markets' organic sales growth would have been a combined 7%.

AMS adjusted operating profit grew 6% for the year.

We benefited from the incremental profits from Tekra as well as lower input costs, which more than offset the modest organic sales decline.

Adjusted operating profit margin contracted 120 basis points, reflecting the organic sales decrease.

For the fourth quarter, adjusted operating profit increased an impressive 65%, with margin expanding 230 basis points.

This strong growth, again, captures the Tekra acquisition, but also the very strong organic sales growth in the quarter and was amplified by the margin benefit of the rapid growth and our high-value transportation film products.

For Engineered Papers, full year sales were down 3% or 2% ex currency.

Lower volumes were partially offset by favorable price/mix effects.

Adjusted operating profits increased an impressive 8% for the year, with margins expanding by 250 basis points.

The margin expansion reflects the positive mix shift towards high-value products, operational improvements and lower input costs.

EP segment profit for the year was very strong and was well above our recent multiyear trend, as Jeff noted.

While fourth quarter sales and operating profits were lower versus the fourth quarter of 2019, this was primarily due to very strong high-value sales a year ago, which created a difficult price/mix comparison of negative 6%.

However, as mentioned, price/mix for the full year was still a net positive.

Regarding unallocated expenses, we saw an increase of approximately $3 million for the full year and $4 million for the fourth quarter.

We incurred several million dollars of consulting and acquisition diligence expenses during the fourth quarter, which accounted for the increase.

These projects aside, unallocated expenses would have been generally in line with 2019 levels.

On a consolidated basis, sales for the year increased 5% and sales in the fourth quarter increased 17%.

Adjusted operating profit and EBITDA each increased 8% for the year and increased 14% and 15%, respectively, for the fourth quarter.

We are very pleased to deliver these strong results with a challenging operating and economic environment.

Full year 2020 GAAP EPS was $2.66 versus $2.76.

The most material comparison items relate to restructuring and other expenses mostly in the EP segment in relation to the Spotswood shutdown and the 2019 Brazil tax assessments.

Please refer to our non-GAAP tables for details on these items.

On an adjusted basis, EPS for 2020 was $3.68, up 4% versus 2019, marking our third consecutive year of adjusted EPS growth.

We believe we are establishing a solid track record for consistent growth, which is due to both our strategic efforts and internal investments to diversify the company's portfolio and shifted towards growth markets.

We have achieved this growth in both positive and challenging economic environments.

Fourth quarter 2020 GAAP EPS decreased to $0.48 from $0.64.

The decrease was largely due to restructuring expenses related to the shutdown of the Spotswood site.

Adjusted EPS decreased slightly to $0.77 from $0.80 due to a higher tax rate and recall that adjusted operating profit and EBITDA both increased during the quarter.

The tax rate embedded in the full year 2020 adjusted EPS calculation was 21%, up from 19.3% in 2019 due to changes in geographic earnings mix and changes in certain tax laws.

For the fourth quarter, the tax rate embedded in adjusted EPS was 21.7%, up from 15.8% in last year's fourth quarter.

The low rate in Q4 2019 was booked to reflect our full year rate.

While we would normally provide annual adjusted EPS guidance at this time, we are restricted from making certain forward-looking comments as we maintain compliance with U.K. takeover panel regulations surrounding our pending offer for Scapa Group, a U.K.-based public company.

We can, however, provide some directional comments in the meantime to assist the investment community in understanding our outlook.

First, excluding any financial impacts from the pending acquisition, we would expect our base business to continue to deliver another year of adjusted EPS growth.

Second, we would expect our EP business to have its operating profit revert toward the multiyear trend after a particularly strong 2020.

We believe this pullback to normalized levels will be more than offset by anticipated profit growth in AMS from expected strong organic sales growth.

Third, we would expect a decrease in unallocated expenses due to the non-repeating nature of the consulting and acquisition diligence expenses from the fourth quarter of 2020.

Lastly, we expect another strong year for free cash flow as while some capital projects were deferred from 2020 into 2021, none are so substantial as to dramatically impact our cash flow.

We acknowledge this may be a frustration given our history of providing annual guidance at this point.

But we fully intend to provide full year adjusted EPS guidance, including the impact of the pending Scapa acquisition after the transaction closes, and we're permitted to make forward-looking comments about our business.

Moving to cash flow and liquidity.

To summarize, we generated $162 million of operating cash flow and $128 million of free cash flow in 2020, both up from 2019 levels.

CapEx of $33 million was below our initial expectations for the year as we continue to prudently deploy capital.

We currently stand at 2.3x net debt to adjusted EBITDA for the terms of our credit agreement.

For perspective, on our track record for delevering post acquisitions, our net leverage was at 3.2x after we closed the Conwed acquisition in 2017 and reached 2.1x at year-end 2019, just prior to acquiring Tekra.

Post the Tekra acquisition, we were at 2.7x at the end of the first quarter of 2020 and have delevered 0.4x since that point, showing we have consistently delevered following acquisitions.

Lastly, as of year-end, we had approximately $500 million of available liquidity between cash on hand and our revolving credit facility.

Of course, our capital structure will look different upon a successful close of the pending Scapa transaction.

As we've disclosed already, we are currently in the process of a term loan B financing, which is expected to close next week to finance a portion of the acquisition.

Upon close, we expect net leverage to be between 4.0x and 4.5x.

Now back to Jeff.

Thanks, Andy.

So to conclude, I'd like to reiterate some key highlights about 2020 and share some positive perspective albeit with some limitations on our outlook and strategy.

We are definitely proud of the results we achieved in 2020, and the people who work together to make that happen.

The year was not without challenges, ranging from finding solutions to keeping our employees safe, while still providing great service to our customers, to flexing our operations in order to meet high demand for certain product lines.

Our resilience was truly tested in 2020, and I firmly believe we have delivered.

And hopefully, our results of this year demonstrate we are capable of solid financial performance even in a difficult and volatile operating environment.

Our paper business exceeded our expectations, delivering meaningful profit growth and once again generated robust free cash flow.

AMS had its first $500 million year and despite the mid-year headwinds, rebounded sharply in the fourth quarter and is poised for strong organic growth in 2021.

And when we consider our overall portfolio, we believe our diverse end markets provide a good balance of stability plus growth opportunities that should serve us well as we continue to expand.

Speaking of expansion, I'd also like to reiterate some themes from our investor call when we announced the pending acquisition of Scapa.

First, Scapa advances our successful value-added solutions strategy as it expands our core competencies, adds new capabilities and enables us to bring our customers a more comprehensive suite of solutions.

Broadening offerings and technologies to help solve our customers' challenges is our long-term strategic direction.

And this acquisition would mark another significant step forward in our value-added capabilities to support our customers.

Second, Scapa will give us immediate critical mass in the growing medical materials space with approximately $250 million in annualized sales between us.

Their focus on innovative skin-friendly technologies and their end-to-end offerings range from adhesive formulations and product design through converting and packaging finished products and extends to compliance and regulatory approvals.

Third, we would also add an industrial division with highly complementary capabilities and overlaps with several end markets we already serve, such as transportation and construction.

And most importantly, both groups come with significant people talent.

Last but certainly not least, the addition of Scapa is expected to push SWM sales towards $1.5 billion and AMS towards $1 billion of annualized sales.

So nearly 65% of the combined company sales were generated -- would be generated in growing segments such as medical, filtration, transportation, infrastructure and construction and industrial.

Bottom line, we expect this transaction will enhance SWM's long-term growth profile.

While we cannot yet comment on our 2020 outlook other than directional items, Andy referenced, we are excited about the many strategic efforts to grow our base business, and we look forward to closing the transaction and sharing details on our financial outlook at that point.

That concludes our remarks.

Janica, please open the line for questions.

(Operator Instructions) Our first question comes from the line of Chris McGinnis of Sidoti & Company.

Maybe if you could just start within AMS and just that strength you're seeing in transportation, you talked about (technical difficulty) near-term, can you maybe -- how much of that is pent-up demand that was waiting?

And I know that's obviously a big part of it, but maybe just the organic growth of that in the sense of a more normalized trend.

Do you think you get to that in the back half of the year?

Just trying to get a little bit of a feel around that growth.

I mean, it was very, very strong in the quarter, obviously.

Yes, sure, Chris.

I'll be happy to try to give you some color like -- and as you said, it's hard to give you the exact interpretation.

Certainly, with the incredible strength we had in the fourth quarter, part of that was back-up demand.

So many of our suppliers as we had indicated lowered their supply chains earlier in the year as some of the consumption was reduced.

And then, I think, everybody was a bit surprised about how rapidly the marketplace returned to normal.

If you recall, quite a bit of that marketplace is growing fast in China, and that market recovered earlier.

And so we saw a rapid increase in people trying to fill supply chains.

Now with that said, we have always said this is one of our fastest-growing markets overall, and I don't think those trend lines have changed at all.

So I think you're seeing a little bit of combination of both, a little bit of restocking supply chains to normal levels, and then we continue to see strong long-term growth opportunities for this marketplace.

Great.

Very helpful.

And I guess just in thinking about cost pressures, when you look out at '21, anything to highlight on the cost side for raw materials?

Yes.

I think, of course, the first thing that's on everybody's mind is the rapid increase of the polypropylene pricing.

We're seeing those same headwinds that everybody else, I'm sure, is reporting throughout the industries.

But we have a number of activities in place to help mitigate some of those effects.

So that's everything from contractual price increases to other types of price increases.

We're also doing things on the operations side around scrap reduction, efficiency, et cetera.

So we have numerous programs to offset that, but it's certainly not the way you wanted to start the beginning of the year because I think globally, most people would say, this is -- the amount of rise of polypropylene has been unexpected.

I think the other point, though, to continue to emphasize is that the majority of our resin costs are for our thermoplastic polyurethane films, the transportation industry, and we're not seeing those types of cost pressures on those resins.

Okay.

And I guess just in terms of impact, it sounds manageable, at least.

Is that more forward-loaded in the year or more back half?

And I guess, can you think about that for demand trends?

How you -- you talk about growth for the year, I know you can't say much because of the pending acquisition, but as you think about the year, just given 2020 was so different, what's the expectation for growth as you go out?

And is there any cadence or anything as you think about the year playing out that should be highlighted?

Sure.

So I'll take the first stab at that.

The first thing I would highlight and just we kind of always reemphasize is that this is a portfolio, and it's a portfolio effect.

So Jeff was just mentioning what happened in the fourth quarter specifically.

And for the year, let's say, even like a market like medical, that was up all year, I would say, pretty significantly.

It still was up in the fourth quarter.

And then filtration, it sort of puts and takes.

We had really high-growth in air.

Water would have been a little bit weaker last year, and now we look at in the fourth quarter and water sort of roared back and now we're really bullish in that outlook.

So I'm giving you a long-winded answer of really saying it's really a portfolio effect.

And so when we look at the growth lines for 2021, I would say transportation, we're exceptionally bullish on.

I mentioned that it was up 70% in the fourth quarter.

Now that's not sustainable, but we still expect really strong growth in that segment.

Air will have a tough comparison.

We still expect it to grow, but water filtration should be really strong next year.

So we kind of -- we talk about our sort of key end markets that are really the growth drivers for us.

We're really optimistic about transportation films.

We're really optimistic still about filtration.

We're optimistic about medical.

And I know you would love to hear something about a specific sort of percentage range of growth.

But because of some limitations, because of the U.K. takeover panel, we'll be able to get into more color, hopefully, at our Q1 call or certainly when we close Scapa, we'll provide more color and outlook for the year.

I appreciate the color and understand the regulations, I guess, your up against.

And just turning to EP, a little change there, can you just walk through maybe the thought process for maybe price and mix, obviously, a different set of portfolio for you in -- versus technical.

But our AMS, just how do you think that playing out for the year?

I know you talked to margin side, the profit side, but just demand trend in the outlook given 2020?

Yes.

I mean, we continue -- and it's been a conscious effort, probably over the last, even 2 years, where we've been much more focused on profit growth versus the top line number.

And that's why you've seen our margin continue to creep up here over the past couple of years.

I don't think that's really going to change.

I think the one thing to note from 2020 is that you did see the attrition rate moderate fairly significantly from where we were tracking from 2017 through '19.

So that is tempered.

Remains to be seen how that rate really changes in '21.

But at the end of the day, we still continue to focus on a lot of the high-value products, whether it's our LIP papers, the wrapper and binder products, Recon, Heat-not-Burn, all those are really the high-value products, and we continue to expect to have a good, solid, stable business there.

And at this time, there are no further questions in queue.

And I'll now turn the call back over to Jeff for closing remarks.

Okay.

Thank you, Janica.

Well, again, everyone, thank you for tuning in and listening to share our story.

I want to close again with positive comments about just the contributions of our people.

We say many times that people make the difference, I think, this year, you saw absolute proof of that.

Without our global teams, it is impossible for us to have achieved these results.

I'm really proud of the results, but I'm even more proud of our global team.

So I want to thank them again and thank everyone and look forward to sharing more information in Q1.

Thank you.

This concludes today's conference call.

You may now disconnect.