2017 SWM Announces Third Quarter 2017 Results and Dividend Increase
ALPHARETTA, GA, November 1, 2017 -- Schweitzer-Mauduit International, Inc. ("SWM" or the "Company") (NYSE: SWM) reported earnings results for the three month period ended September 30, 2017 and announced a 2% increase of its per share quarterly cash dividend rate to $0.43 from $0.42.
Adjusted measures are reconciled to GAAP at the end of this release. Financial measures are from continuing operations and per share data is on a diluted basis. Financial and operational comparisons are versus the comparable prior year period. Key definitions: Advanced Materials & Structures segment (AMS), Engineered Papers segment (EP), Low Ignition Propensity (LIP), Reconstituted Tobacco Leaf (RTL), and Heat-not-Burn (HnB)
Third Quarter 2017 Financial Summary
- Total net sales increased 23% to $257.8 million; Advanced Materials & Structures' organic net sales (excluding Conwed acquisition) increased 4% and Engineered Papers' net sales also increased 4%
- GAAP operating profit was $38.5 million, or 14.9% of net sales, up from $30.8 million, or 14.7% of net sales; adjusted operating profit was $45.4 million, or 17.6% of net sales, up from $35.1 million, or 16.8% of net sales
- GAAP EPS was $0.84, up 38%, and Adjusted EPS was $1.00, up 35%; both benefited from an $0.11 non-operating gain from an asset sale (excluding the gain, GAAP and adjusted EPS were each up 20%)
Third Quarter 2017 Business Highlights
- Advanced Materials & Structures segment organic net sales increased 4%, with continued growth of specialty films for transportation leading the portfolio; net sales increased 60% including the Conwed acquisition
- AMS segment GAAP and adjusted operating profit margins expanded 130 and 280 basis points, respectively, reflecting organic sales growth, operating leverage, and the addition of Conwed and related synergies
- Engineered Papers segment net sales increased 4% despite a segment volume decline of 3%; positive mix from LIP volume growth and currency benefits more than offset the anticipated RTL volume decline and pricing reductions
- EP segment GAAP and adjusted operating profit margins decreased 60 and 120 basis points, respectively, due primarily to the expected RTL volume decline
Dr. Jeff Kramer, Chief Executive Officer, commented, "Our business continued to perform well overall in the third quarter, with continued sales momentum and margin expansion in AMS and relatively stable results from EP. Consistent with recent quarters, specialty film demand was strong as sales traction from new channels in Asia continued to bolster our results. In addition, Conwed synergy execution successfully progressed toward our $10 million annualized cost reduction goal by the end of next year. Our most synergistic acquisition to date is on track with our expectations to drive value creation as we optimize the scaled AMS platform."
"Engineered Papers continued to perform as expected, with strong LIP volume growth compared to a soft quarter last year and a temporary customer inventory build in the U.S. LIP growth, combined with pockets of strength in other cigarette papers, helped offset the anticipated volume challenges for traditional RTL. Regarding other reconstituted tobacco products, wrapper and binder sales remained solid and Heat-not-Burn volume for next generation tobacco products continued to ramp up. We are actively working across our customer base on the development of customized HnB products to meet the projected growing demand in this innovative category."
Dr. Kramer concluded, "As we close out 2017, our near-term priorities remain execution on the Conwed integration synergies, manufacturing efficiencies, and growth initiatives across the businesses to deliver on our previously announced 2017 Adjusted EPS guidance of $3.15. Key strategic growth investments, including a new film line in Europe, the development of specialty filtration papers, and HnB product roll-outs, are all hitting their respective milestones with expected benefits in 2018. We are at an exciting juncture in our evolution as we head into next year, with a scaled and growing AMS segment designed to more than offset the long-term volume and pricing headwinds in the tobacco-driven EP segment. Our free cash flow has remained healthy, supporting another dividend increase, and our outlook for sustainable long-term growth is significantly improved as a result of these transformative strategic actions."
Third Quarter 2017 Financial Results
Advanced Materials & Structures segment net sales were $116.2 million, up 60%, including the Conwed acquisition (Conwed net sales were $40.7 million). Organic net sales increased 4%, driven by double-digit growth of surface protection films for transportation. Filtration sales weakness was partially offset by strength in medical. Conwed results remained generally in line with our expectations, driven by strong sales growth of building and agricultural products into the infrastructure and construction end-markets. GAAP operating profit was $15.4 million, up 77%; adjusted operating profit was $22.0 million, up 88%. GAAP and adjusted operating profit margins expanded 130 and 280 basis points, respectively. The organic sales increase, favorable mix, and the Conwed acquisition (including synergies) contributed to margin expansion.
Engineered Papers segment net sales were $141.6 million, up 4%; positive mix effects from strong LIP performance coupled with positive currency movements more than offset the 3% overall segment volume decline, pricing concessions, and as expected lower third-party LIP royalties. The overall volume decline reflected higher cigarette papers volume, including double-digit growth in LIP papers due to low volume in the prior year quarter and a customer inventory build, and higher non-tobacco sales, which were offset by lower traditional RTL volume. GAAP operating profit was $32.3 million, up 1%; adjusted operating profit was $32.7 million, down 2%. GAAP and adjusted operating profit margin declined 60 and 120 basis points, respectively. Operating profit margin was negatively affected by lower RTL volume, pricing, and LIP royalties, which were partially offset by LIP growth and favorable currency movements.
Unallocated GAAP and adjusted expenses were $9.2 million and 9.3 million, down 7% and 6%, respectively, due primarily to favorable timing of third-party consulting services. GAAP and adjusted Unallocated expenses were both 3.6% of total sales, down 110 basis points.
Consolidated net sales were $257.8 million, up 23%, and 4% on an organic basis. The Conwed acquisition contributed $40.7 million of incremental net sales. GAAP operating profit was $38.5 million, up 25%, and GAAP operating profit margin was 14.9%, up 20 basis points. Adjusted operating profit was $45.4 million, up 29%, and adjusted operating profit margin was 17.6%, up 80 basis points. Adjusted EBITDA was $59.1 million, up 29%, and adjusted EBITDA margin was 22.9%, up 100 basis points.
GAAP Income was $25.7 million, up 37%; this equated to GAAP EPS of $0.84. Adjusted income was $30.7 million, up 35%; this equated to Adjusted EPS of $1.00. Interest expense was $7.4 million, up $3.5 million due to the Conwed acquisition and related debt structure changes. Other income was $4.1 million, up $3.4 million due primarily to a $4.8 million pretax gain, or $0.11 per share, from an asset sale. The Company's effective tax rate was 27.0%, down from 38.8%, due to favorable discrete items in the current year, versus unfavorable discrete items in the prior year period. The Chinese JVs were neutral to GAAP EPS and Adjusted EPS, down from a $0.06 contribution due to sales timing and challenging market conditions. Net currency movements had a 2% positive impact on sales and a $1.7 million positive impact on operating profits; translation impact of net currency movements was positive $0.01 to both GAAP EPS and Adjusted EPS.
Non-GAAP Adjustments reflect items included in GAAP operating profit, income, and EPS, but excluded from adjusted operating profit, income, and EPS. The most significant item was purchase accounting expenses, which were $0.14 per share, up $0.08. These expenses capture the ongoing non-cash intangible asset amortization, as well as any non-cash one-time inventory step-up charges, associated with AMS acquisitions. Restructuring and impairment expenses were $0.02 per share, down $0.01, and were primarily related to synergy-driven headcount reductions in AMS.
Year-to-Date 2017 Financial Results
Advanced Materials & Structures segment net sales were $334.0 million, up 55%, including the Conwed acquisition (Conwed net sales were $106.2 million), with year-to-date trends generally consistent with those of the third quarter. Organic net sales increased 6%, led by specialty films for transportation; this growth was partially offset by softness in filtration sales. Conwed's overall results were generally in line with the Company's expectations, driven by sales growth of erosion and sediment control products into the infrastructure and construction end-markets. GAAP operating profit was $40.9 million, up 79%; adjusted operating profit was $62.5 million, up 92%. GAAP and adjusted operating profit margins expanded 160 and 360 basis points, respectively. Total segment organic sales growth, favorable mix, and the Conwed acquisition (including synergies) contributed to margin expansion.
Engineered Papers segment net sales were $412.4 million, down 3%, mainly due to a 3% overall volume decline. Price/mix was neutral and expected lower LIP royalties were offset by positive currency movements. Lower RTL and cigarette paper volumes were partially offset by growth of non-tobacco paper volumes. GAAP operating profit was $90.0 million, down 13%; adjusted operating profit was $91.7 million, down 14%. GAAP and adjusted operating profit margin declined 250 and 280 basis points, respectively. The decrease in high-margin LIP and RTL sales and manufacturing inefficiencies resulting from lower overall segment volume impacted year-to-date profitability. In addition, year-to-date profitability was impacted by high costs in the first quarter of 2017 related to certain production line restart issues.
Unallocated GAAP expenses were $26.3 million, flat compared to the prior year; adjusted unallocated expenses were $26.2 million, up 1%. GAAP and adjusted Unallocated expenses were both 3.5% of total sales, down 60 basis points.
Consolidated net sales were $746.4 million, up 16%, but were flat on an organic basis. The Conwed acquisition contributed $106.2 million of incremental net sales. GAAP operating profit was $104.6 million, up 5%, and GAAP operating profit margin was 14.0%, down 160 basis points. Adjusted operating profit was $128.0 million, up 13%, and adjusted operating profit margin was 17.1%, down 50 basis points. Adjusted EBITDA was $158.4 million, up 10%, and adjusted EBITDA margin was 21.2%, down 120 basis points.
GAAP Income was $61.7 million, down 6%; this equated to GAAP EPS of $2.01. Adjusted income was $78.0 million, up 4%; this equated to Adjusted EPS of $2.54. Interest expense was $20.0 million, up $7.4 million due to the Conwed acquisition and related debt structure changes. Other income was $3.2 million, down $0.8 million. The Company's effective tax rate was 30.2%, down slightly from 30.6%. The Chinese JVs contributed $0.01 to GAAP EPS and Adjusted EPS, down $0.07 due to sales timing and challenging market conditions. Net currency movements had an immaterial impact on sales and $1.3 million positive impact on operating profits; translation impact of net currency movements was neutral to both GAAP EPS and Adjusted EPS.
Non-GAAP Adjustments reflect items included in GAAP operating profit, income, and EPS, but excluded from adjusted operating profit, income, and EPS. The most significant item was purchase accounting expenses, which were $0.44 per share, up $0.25. These expenses primarily capture the ongoing non-cash intangible asset amortization, as well as any non-cash one-time inventory step-up charges, associated with AMS acquisitions. Restructuring and impairment expenses were $0.09 per share, flat compared to the prior year.
Cash Flow, Debt, & Dividend
Year-to-date cash provided by operating activities was $93.2 million, up $10.1 million. The Company's working capital-related cash outflows were $21.8 million, up $7.4 million, primarily resulting from increased receivables associated with higher sales, inventory builds related to facility relocations, and higher cash tax payments. Capital spending and capitalized software totaled $30.1 million, up $10.9 million, due primarily to investments for specialty filtration paper production and the addition of Conwed. Free cash flow was $63.1 million, essentially flat with the prior year period. Year-to-date, the Company has paid dividends to shareholders totaling $38.7 million.
Net debt was $593.4 million on September 30, 2017, versus $333.0 million at December 31, 2016 due mainly to the January 2017 closing of the Conwed acquisition. Pursuant to the debt covenants and certain adjustments to foreign cash balances contained in the Company's credit facility, the Company's net debt to adjusted EBITDA was approximately 2.9x as of September 30, 2017.
The Company announced a 2.4% increase of its quarterly cash dividend to $0.43 per share from $0.42 per share. the dividend will be payable on December 22, 2017 to stockholders of record as of December 1, 2017.
2017 Financial Outlook
In February 2017, the Company issued annual guidance of $3.15 for 2017E Adjusted EPS. This equated to $2.52 of GAAP EPS based on initial estimates of $0.09 per share of restructuring expenses and $0.54 per share of non-cash purchase accounting expenses related to AMS segment acquisitions that are excluded from Adjusted EPS.
The Company expects 2017 capital expenditures and capitalized software spending to exceed $40 million.
SWM will hold a conference call to review third quarter 2017 results with investors and analysts at 8:30 a.m. Eastern time on Thursday, November 2, 2017. The earnings conference call will be simultaneously broadcast over the Internet at www.swmintl.com. To listen to the call, please go to the Company's Web site at least 15 minutes prior to the call to register and to download and install any necessary audio software. For those unable to listen to the live broadcast, a replay will be available on the Company's Web site shortly after the call
SWM will use a presentation in conjunction with its conference call. The presentation can be found on the Company's Web site in advance of the earnings conference call. The presentation can also be accessed via the earnings conference call webcast.
SWM is a leading global provider of highly engineered papers, films, nets, and non-wovens for a variety of applications and industries. As experts in manufacturing materials made from fibers, resins, and polymers, we provide our customers critical components that enhance the performance of their end products. The Advanced Materials & Structures segment focuses on resin-based rolled goods for the filtration, transportation, infrastructure & construction, medical, and industrial end-markets. This segment was established in 2013 as part of a strategic transformation intended to diversify SWM's historical concentration in the tobacco industry and reposition the Company for long-term growth. The Company currently generates approximately half of its total sales outside the tobacco industry. The Engineered Papers segment remains primarily focused on supplying major cigarette manufacturers with a variety of specialty papers. SWM and its subsidiaries conduct business in over 90 countries and employ approximately 3,400 people worldwide. For further information, please visit SWM's Web site at www.swmintl.com.
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws that are subject to the safe harbor created by such laws and other legal protections. Forward-looking statements include, without limitation, those regarding 2017 guidance and future performance, future market and EPS trends, future EPS contributions of our China JVs and RTL, AMS margins, sales and volume trends, Argotec financial results, growth prospects, capital spending, currency rates and trends and impact on EPS, 2017 momentum, future cash flows, effective tax rates, 2017 LIP sales trends, future RTL volumes, LIP pricing and royalties, diversification efforts of our AMS segment, integration of and accretion from the Conwed acquisition, future results of legacy AMS operations, interest rate swap impacts, future growth of non-tobacco sales, benefits of AMS' new enterprise resource planning system, and other statements generally identified by words such as "believe," "expect," "intend," "plan," "potential," "anticipate," "project," "appear," "should," "could," "may," "typically," "will," and similar words. These statements are not guarantees of future performance and involve certain risks and uncertainties that may cause actual results to differ materially from our expectations as of the date of this release. These risks include, among other things, those set forth in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2016, as well as the following factors:
- Changes in sales or production volumes, pricing and/or manufacturing costs of reconstituted tobacco products, cigarette paper (including for lower ignition propensity cigarettes), filtration-related products due to changing customer demands (including any change by our customers in their tobacco and tobacco-related blends for their cigarettes, their target inventory levels and/or the overall demand for their products), new technologies such as e-cigarettes, inventory adjustments and rebalancings, competition or otherwise;
- Changes in the Chinese economy, including relating to the demand for reconstituted tobacco, premium cigarettes and netting;
- Risks associated with the implementation of our strategic growth initiatives, including diversification, and the Company's understanding of, and entry into, new industries and technologies;
- Changes in the source and intensity of competition in our commercial segments. We operate in highly competitive markets in which alternative supplies and technologies may attract our customers away from our products. In additional, our customers may, in some cases, produce for themselves the components that the Company sells to them for incorporation into their products, thus reducing or eliminating their purchases from us;
- Our ability to attract and retain key personnel, due to our prior restructuring actions, the tobacco industry in which we operate or otherwise;
- Weather conditions, including potential impacts, if any, from climate change, known and unknown, seasonality factors that affect the demand for virgin tobacco leaf and natural disasters or unusual weather events;
- Increases in commodity prices and lack of availability of such commodities, including energy, wood pulp and resins, could impact the sales and profitability of our products;
- Adverse changes in the oil, gas, and mining sectors impacting key AMS segment customers;
- Increases in operating costs due to inflation or otherwise, such as labor expense, compensation and benefits costs, including costs related to the comprehensive health care reform law enacted in the US in 2010;
- Employee retention and labor shortages;
- Changes in employment, wage and hour laws and regulations in the U.S., France and elsewhere, including loi de Securisation de l'emploi, unionization rule and regulations by the National Labor Relations Board, equal pay initiatives, additional anti-discrimination rules or tests and different interpretations of exemptions from overtime laws;
- Labor strikes, stoppages, disruptions or other disruptions at our facilities;
- Existing and future governmental regulation and the enforcement thereof, for example relating to the tobacco industry, taxation and the environment (including the impact thereof on our Chinese joint ventures);
- New reports as to the effect of smoking on human health or the environment;
- Changes in general economic, financial and credit conditions in the U.S., Europe, China and elsewhere, including the impact thereof on currency exchange rates (including any weakening of the euro and Real) and on interest rates;
- Changes in the manner in which we finance our debt and future capital needs, including potential acquisitions;
- The success of, and costs associated with, our current or future restructuring initiatives, including the granting of any needed governmental approvals and the occurrence of work stoppages or other labor disruptions;
- Changes in the discount rates, revenue growth, cash flow growth rates or other assumptions used by the Company in its assessment for impairment of assets and adverse economic conditions or other factors that would result in significant impairment charges;
- The failure of one or more material suppliers, including energy, resin and pulp suppliers, to supply materials as needed to maintain our product plans and cost structure;
- International conflicts and disputes such as those involving the Russian Federation and the Middle East, which restrict our ability to supply product in the affected regions due to the corresponding effects on demand, the application of international sanctions, or practical consequences on transportation, banking transactions, or other commercial activities in troubled regions;
- The pace and extent of further international adoption of LIP cigarette standards and the nature of standards so adopted;
- Risks associated with our 50%-owned, non-U.S. joint ventures relating to control and decision-making, compliance, accounting standards, transparency and customer relations, among others;
- A failure in our risk management and/or currency or interest rate swaps and hedging programs, including the failures of any insurance company or counterparty;
- The number, type, outcomes (by judgment or settlement) and costs of legal, tax, regulatory or administrative proceedings, litigation and/or amnesty programs, including those in Brazil;
- The outcome and cost of LIP-related intellectual property infringement and validity litigation in Europe and the European Patent Office opposition proceedings;
- Risks associated with acquisitions or other strategic transactions, including acquired liabilities and restrictions, retaining customers from businesses acquired, achieving any expected results or synergies from acquired businesses, complying with new regulatory frameworks, difficulties in integrating acquired businesses or implementing strategic transactions generally and risks associated with international acquisition transactions, including in countries where we do not currently have a material presence;
- Risks associated with dispositions, including post-closing claims being made against us, disruption to our other businesses during a sale process or thereafter, credit risks associated with any buyer of such disposed assets and our ability to collect funds due from any such buyer;
- Risks associated with our global asset realignment initiatives, including: changes in tax law, treaties, interpretations, or regulatory determinations; audits made by applicable regulatory authorities and/or our auditor; and our ability to operate our business in a manner consistent with the regulatory requirements for such realignment;
- Increased taxation on tobacco-related products;
- Costs and timing of implementation of any upgrades or changes to our information technology systems;
- Failure by us to comply with any privacy or data security laws or to protect against theft of customer, employee and corporate sensitive information;
Changes in tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities;
- Changes in construction and infrastructure spending and its impact on demand for certain products;
- Potential loss of consumer awareness and demand for acquired companies' products if it is decided to rebrand those products under the Company's legacy brand names; and
- Other factors described elsewhere in this document and from time to time in documents that we file with the SEC.
All forward-looking statements made in this document are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such, and should only be viewed as historical data.
For additional factors and further discussion of these factors, please see SWM's Annual Report on Form 10-K for the period ended December 31, 2016 and other reports we file from time to time. The financial results reported in this release are unaudited.
Non-GAAP Financial Measures
Certain financial measures and comments contained in this press release exclude restructuring expenses, certain purchase accounting adjustments related to AMS segment acquisitions, interest expense, income tax provision, capital spending, capitalized software, and depreciation and amortization. This press release also provides certain information regarding the Company's financial results excluding currency impacts. This information estimates the impact of changes in foreign currency rates on the translation of the Company's current financial results as compared to the applicable comparable period and is derived by translating the current local currency results into U.S. Dollars based upon the foreign currency exchange rates for the applicable comparable period. Financial measures which exclude or include these items have not been determined in accordance with accounting principles generally accepted in the United States (GAAP) and are therefore "non-GAAP" financial measures. Reconciliations of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP are included in the financial schedules attached to this release.
The Company believes that the presentation of non-GAAP financial measures in addition to the related GAAP measures provides investors with greater transparency to the information used by the Company's management in its financial and operational decision-making. Management also believes that the non-GAAP financial measures provide additional insight for analysts and investors in evaluating the Company's financial and operational performance in the same way that management evaluates the Company's financial performance. Management believes that providing this information enables investors to better understand the Company's operating performance and financial condition. These non-GAAP financial measures are not calculated or presented in accordance with, and are not alternatives or substitutes for, financial measures prepared in accordance with GAAP, and should be read only in conjunction with the Company's financial measures prepared in accordance with GAAP.
Chief Financial Officer
Director of Investor Relations