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SWM Schweitzer-Mauduit International

Participants
Mark Chekanow Director of Investor Relations
Jeffrey Kramer Chief Executive Officer
Andrew Wamser Executive Vice President and Chief Financial Officer
Daniel Jacome Sidoti & Company
Kurt Yinger D.A. Davidson
Call transcript
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Operator

Welcome to the SWM Third 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. participants floor placed your will the all mode a questions time, presentation. the and be this have in been listen-only following At open for over pleasure It turn now Instructions] my [Operator the is floor to Mr. to Chekanow. you begin. Sir, may

Mark Chekanow

Mark results. Thank Director Relations for us of you third our Chekanow, to you, Thank morning, discuss SWM. quarter Investor Good joining Catherine. I'm at XXXX earnings

our materially conference Actual to which Report begin, Form you detail that number differ today's I'd results quarterly Exchange on Annual and statements. forward-looking like a remind our filings the in by call we are on suggested include reports including Before comments may for and more results these our XX-K. from may Form the on Commission Securities discussed comments in reasons of XX-Q

comparisons during stated financial Some measures closest the call this the to presentation earnings metric financial measures financial the available the will over year are and the turn to of are GAAP relate of release earnings presentation these and of measures, appendix otherwise, on operations. now discussed period This the Relations website continuing this and www.swmintl.com. and section Unless measures operational reconciliations to are call our I in the included Jeff. non-GAAP Investor to release. prior

Jeffrey Kramer

$XXX you, And and EPS million to with adjusted everyone. good up Yesterday, morning, sales we $X.XX. Thank X% Mark. results reported third quarter up

inflationary a good During material the news. quarter highly which raw conceals we offset to pieces hard environment several of worked

For in organic AMS. growth example, quarter delivered of we solid another

quarter. project complete cost pressured Austin quarter two takeaways detail the closure final But from fourth the stage the input set in from topics is three in facility call. these expenses Although We'll the decline fixed now cost consolidation important our to with margins. are: throughout the headwinds

the financing implemented a continue third, and strategic flexibility. round bond sheet as raw we've additional provides cost do to Second. quarter, offset to highly And which we third increases balance of we'll completed during materials price another so recently pressure, required.

will While does well challenging modest the Though debt impact on bond carry in and it input rate of cost this essentially timed been and costs, as a interest earnings, additional a rising environment. rate to have a still have expense neutralize has offsets out generated inflation enough higher a to on was portion these headwind the good we plan close expect year. we year, be

third to of note guidance. lower refinancing we the initial our quarter impact the expect per XXXX finish gain activities, our of quarter end expense the related of a Excluding sale. to the was a per bonds quarter share asset skewed Of from to and XXXX the and year prior of year $X.XX EPS comparison third activities, share by third $X.XX an adjusted recent of at refinancing

with delivered X% solid investment the during cells segments. AMS with our theme. to and shifting in sales digits, the growth momentum segments. Now leading to sub continue Filtration operating awarded our portfolio consistent up other organic double business have growth quarter strong

the this earlier start business We Medical also posed the tough installation come year solidly products. year-to-date. with and track and driving on erosion area sediment We see were growth core Transportation growth. are up control get to both encouraged our this and products modest back had sales infrastructure after Recall challenges back a conditions that of saw year. downstream our slow our construction weather and users to for had

coming were higher quarters. impacted costs, driven growing increased awareness. by by Our category penetration in films operating year we to expect margins many and business and earlier with trends remains product AMS a input across industries, line consumer transportation subside but globally margin Consistent this pressure the

during up were year. compared polypropylene for to continued the increase resin XX% last and third Regarding to prices prices, market approximately quarter

significant purchase entire doesn't polypropylene a our cost basket, resin While us. it is represent for

challenging In year of rising and have a to a a base. procurement had some In team. cost XXXX. we price a as margins resin our addition continued implemented Unfortunately AMS large increases the heading we were third for standpoint typically attractive a will generally quarter high to price by opportunistic in last caught prices, portion XXXX response environment, we revenue timing to but recovery purchases implementation, by be market price up increase from we on escalation believe lag comparison into boosted rising resin, another recently in

Austin Another impact on cost the closure. margins the stage associated where final with

we of are call. facility have We the the at that this completely exited pleased report time to

component have Conwed As throughout our reducing million of by the fixed plan we been $XX discussing costs. action important synergy driving an is this year,

As to come Austin. duplicate these we is occurring in stages final been have in typical the costs exercises, have as essentially we

this lines several project a on is will as expected costs. Though We essentially results. to than transitioning commitments. price kept complete increases for Austin volumes than higher believe the that execute quarter from we longer quarter the resin we and facilities. benefit lower AMS tough our had against the a also increase combined anticipated were and slightly we We other expect running for products certain fourth little closure All to our more originally in ability cost expected impacting demonstrates margins, than told, QX with fixed

longer-term our product we filtration We pressures, sales synergy of between committed paper unique While product EP's a expanding commercial capabilities projects. remain generated realizing addressing have important to first in growth filtration recently our offerings manufacturing and category. organization we strategic are short-term our AMS' new a cost executing

for important the is notable products, film commercial customer in that received full this is and producing new highlight Another investment. marking its first quality line high milestone our UK qualification, another

no volumes a Papers, were that in There a date business, standard Euro Engineered is paper to the a decline, lines our is compared generally been papers which volume supported level. a but X%, products for to and strong was no price quarter XX% our EP X% up decline volume the segment giving year-to-date outperforming benefit The positive also AMS, paper to business. rising tobacco the separator Currency for performance non-tobacco product wrapper volume specifically trends by which offset tailwind mixed specialty from was longer our during the tobacco last than has last X% and drove costs full reflecting the in providing to products. pullback more cigarette felt the pressure a us particular the our driven price year's of second battery Similar binder recon year-over-year decline of provided quarter rest the market. good price, by pulp mix LIP year. nearly strong Moving increases wood decline to sales to compared quarter

escalators to take effect our cigarette with early manufacturers contracts prices with large have XXXX. where portion We raised price permit of in a further contract

Regarding do like which with heat-not-burn, the recently has us volumes major category by risk some fact and particularly data of to participate. as heat-not- that product companies, headlines those on were that vaping the tobacco as increased the Consistent reduced down. entirely been well in affect an the there US as and not broader the category, commentary our that products from we I'd different burn which are reported quarter third review

As across substantially as new markets, remain customers new our we international our rollout variety year-to-date. such landscape a up lumpy this as are products volumes and have of commercial navigate this of shared previously,

that optimistic customer We continue from to linear its discussions it our not across quarter-to-quarter. on remain to and active path But a engage our may base, long-term capitalize about ability very repeat, be development in potential.

tobacco for market approved steps. and the headlines nicotine the yet liquids to where the FDA's not call technology Simply has in flavored a in put, adolescents. are participated. we among As vaping products concern now popularity over their US we heated FDA not will primary regarding a US materials turn the Andy? reminder, products is I vaping This about concerned supplied is the This recent has base the escalating. over been been

Andrew Wamser

profit Thank XX.X% The Jeff. largest which segment with down basis sales, was net contraction function $XXX third several our starting million. versus increased was factors. of market to year. review cost. the Adjusted I'll now you, $XX.X sales or million of last was XXX Tthe In X% a performance. resin of quarter points results AMS higher financial operating

elevated compared market last prices, costs As Jeff from year's to earlier, quarter driven some attractive referenced we when purchases. higher were benefited resin very opportunistic by

impact of of points perspective, resin was cost basis for contraction. XXX year-over-year approximately For margin the responsible

on pressure approximately XXX site these basis points contraction. --more points which basis of In offsetting for organic about of margin Austin with than the accounted inefficiencies aggregate, key benefits closure, the was other The our associated XXX cost margin elements totaled growth.

was our both volume. our with last of which cost an offset as favorable the a significantly driven and Wood up Going closing X% than newly mix XXX forward, down material we implemented XX.X%, The were X% uplift was to margins. the Engineered XX% in operating X% year-over-year provide the segment AMS price this raw for benefits down The comprises year impact expect the decline basis to net year. providing was accounted versus The the margin majority Paper the more decline that margin sales the of higher to Austin year-over-year. pulp and costs adjusted of increases, points full for facility margin. inflation segment's priced operating of by

there $X.XX, down unallocated prior efficiency increases. consolidated million $X.XX year XX-month our pressures the quarter by early for our general down plan. more from Austin the basis a take GAAP is $XX.X demonstration Adjusted due On sales EPS spending But control. third was a XX-month during from trend but X% indicative both just associated EBITDA million price effect solid to benefit flat period synergy the escalators operating with by expenses with impact. essentially to driven our as and Adjusted is expenses of material adjusted had and not profit last look to Overall, We majority quarter EBITDA $XX.X costs until The $XXX currency was the was no X% items. will earnings, of and opportunities, year. raw a corporate the acquisition despite improvement continue versus trailing of increase expenses, adjusted for year-to-date. was up consolidated This was a a and a XXXX. million, two reasons a and of administrative the contractual increased price Shifting net we're trailing rising prior cost the decreased XXXX minimal fluctuations in short-term discussed. XX%

US. related book in the legislation as in fourth The from benefit tax tax adjustment expenses the new the the of an quarter was of result a first to $X.XX XXXX, a

consideration decline were $X.XX related XXXX The debt $X.XX a adjusted contingent quarter EPS gain quarter an were a a the gain excluded adjusted adjusted acquisition. had adjusted And Both ago. with from Of out profit an reminder, third revaluation $X.XX included $X.XX year's note, offset last of these a apples-to-apples from lower our EPS asset to year $X.XX was the of rate. from ago Conwed issuance more unamortized of effectively EPS comparison. making second which by quarter a of liability The a earn- tax versus third refinancing year costs an credit in $X.XX as facility. associated write-off sale, operating partially was third items

quarter tax Our ago for $X.XX rate normalized rate normalized and the EPS on was from XX.X% XX.X%. third negative year XX% down Currency quarter. impact year-to-date now was stands at a

at at growth, projection been pricing efforts more the now euro actions XXXX there our relative well exceeding expectations prior Looking to has we on subsided. have Sales to initial takes. material to early several year. by positive run profitability and growth said and our are various the as improve full-year has organic continue favorable the Tax been guidance, than rates costs fairly beginning offset strengths to puts of raw calls, performance though in our

believe putting still track lower As earlier, Jeff the financing, to original of at impact our we of we're referenced the guidance. the bond finish on aside end

adjusted contemplated expected not negative XXXX that However, have are guidance a our our year. to when was $X.XX EPS earlier impact this recent activities we financing issued to

in free was approximately debt net Moving and leverage at below million will in from the We liquidity, our our was $XXmillion a XXXX up quarter year-to-date perspective and guidance our from cash year-to-date, $XX at we million a third the year adjusted plan. at the facility, year-end finished fourth cash the approximately $XX anticipate million, below ago. for original but flow down the CapEx which terms million. From $XX quarter, analyzes is flow quarter, spending $X of to were for the EBITDA end XXXX. of Xx credit X.Xx heavier likely

key build strategic dividend The the long-term notes announced record quarter increase third continuing SWM track refinancing Lastly, a with benefits. issuance in milestone debt to we our inaugural of dividend included in a which of X% growth. completed for unsecured was our our several

our First, the unsecured to our of structure addition debt capital financial enhances flexibility.

debt. Second, rising were a fixed rate in in lock rate year interest we eight able environment, to

to base bank fixed spinning the Third, capital beyond syndicate. market accessed we our supportive creditors have our like new investor income adding facility

our maturing XXXX and highlight to have a of our minus and BAXBB financial demonstrating term confidence an years we rating SWM loan and been corporate and that rating on which in the five revolver otherwise generation, Lastly, and would from We their respectively, seven maturities received reset credit the flow process, growth XXXX. potential cash diligence rigorous our attractive business. agencies in through the business

Of rate. higher course, interest these do a bonds carry

purpose, the modeling reduction baseline effective given term floating activity. M&A rate using on would interest associated there of and mile X% For or debt the current throughout with any debt, interest approximately we some rate absent potential of loan rising XXXX suggest From a rates. and LIBOR rates you reflecting the revolver revolver can assume

higher sets two and was We note to of neutral. negative of were the to expense XXXX during is the $X.XX. on financing third fourth that financing quarter expenses incurred activities, completed due September impact $X.XX Regarding impact exit the in expected quarter be the result leveraged these

$XXX bonds proceeds borrowings As the $XXX senior $XX unsecured turn notes. new structure loan. million The million on call we use term quarter, the third end Jeff. loan also debt which includes from our million over $XXX million facility repay back revolving credit and on of will comprised our million facility, to At our I of the a the $XXX outstanding credit to And the was of term accordion. and

Jeffrey Kramer

Andy. you, Thank

costs we the unfortunately we above and operating of of enter the on acknowledge input assumptions delivering of homestretch year, that on headwinds on We diligently remain along XXXX, at course outset are based we the our our the As volatility earnings the plan. focused way.

However, believe to we acted remain have have environment a strategic committed direction. we we as appropriately navigated this long-term and

original the the by of We All and interest discussions especially year. the have told, taxes completion finding fairly impact, with that pricing excluding latest collaborative guidance AMS, cost the at our is thus our questions. year-over-year our Austin of far our are the frequent accepted are discussions. of believe benefits consolidation in and achievement offsets consider our SG&A appreciate We significant lower and increases easy, well, these our remarks. customer the approach the EP concludes generally weathering support. in That We low face and to valuable the million from look in been please the never and supplement market next customers of discussions storm expectation bond roughly resets actions. increases pricing a $XX to forward in facility in XXXX. realizing context anywhere our finish we of input of to cost centric some our continued are open your increases we the in controls George, the We for end line pricing early

Operator

Co. the [Operator Instructions] Jacome from line comes Our Dan up question Sidoti first and with then

Your line is now open

Daniel Jacome

Good AMS morning. segment. on questions, A the couple first

taken us those off. a little out called have to verticals more water-filtration release on the seems press then you two softness industrial Can granularity please? the think bit some markets, conversely in the market but I give

Jeffrey Kramer

Sure.

with both marketplaces participate actually which good may components osmosis growth in. conversations, one that start are let's go key growth water-based segment. recall particularly two there earlier of segments seen We've that is our filtrations as in reverse that market, into we the in So in you of our

We're delayed. of continue very is previously a also seeing also we're but there. had New process side cycle growth replenishment facility and bit we're seeing our seeing year segment in which been other --last accelerate, to good cycle replenishment fluids. But that construction too filtration growth a that good

a is segment of on more future. we been segments. The industrial into a a of the positive sub continues for that number of hand and very us segment it's overall, other catch-all hope So, the us, for that

that isn't in anything of --a sub on so to that. just number And that overall a our there It's particular nothing in but segment down, our been just of there's discuss have number in material that. segments segments

Daniel Jacome

Okay, no, helpful. that's

around incremental you to off understand trying that so the do so quarters, does some project cycle rolled couple next the the --have replacement outside still speak, delays in left or all there's better. Just just filtration water following turn these on to and

Jeffrey Kramer

Yes.

been So basically fallen just five It falling low efficiency that so RO a actually between to facility. the just have the because rising these cycle life end time for has year-ish last you've those to costs costs you typical system, It's lifestyle related. year. be off in have some replenishment cycle. over the had with sufficiently cost cycles. due time or project last finish those delayed a year at are Those the been once cartridges trade-off replenishment them of been to of installed need aren't clear cycles, the that's efficiency overall of cartridges and --just the usually replacing And energy you life the restock that just been the energy to

Daniel Jacome

you, Got you're that strength seeing Well industrial, or for us on one then there know? okay. the there just to is most two segments

Jeffrey Kramer

Yes. of In pretty-- such think of anything a out. I sub again it's call in there's a much number segments. It's to catch-all. really general it's don't particular

Daniel Jacome

lastly Then so that What's that. I and CapEx are think missed in a your about, little coming again? sorry wanted Okay. talk if driving I to expectations bit

Andrew Wamser

Yes.

this the two sitting related guidance drivers again CapEx the about had conservative did year three we were lower original original are the we here are were beginning is real our estimates. those than we quarters we we other just there end But And we that year. again CapEx really cautiously first $XX end key as anticipated. million I update. the million the year then optimist overall. to as So expenses segment at at look some lower to was said, what are the We existing to million. of as $XX sit --with close be have the $XX would the expect we projects to that for at of The

indicative we some have projects So It's the delayed. it's that what think been is. selective not of potential just there long-term

Daniel Jacome

So original was in guidance. there projects some incorporated the heat -not-burn

So --

Andrew Wamser

CapEx burn of related. within EP would some CapEx include, projects AMS the obviously larger and for not and then EP were the

Operator

question comes from next Kurt Our of with the Yinger line Davidson. D.A.

is Your now line open.

Kurt Yinger

morning, quarter? Mark. volume price it Andy good I just the growth out you to Jeff, AMS within bucket wanted this Yes, the could and start X% and

Andrew Wamser

in low Not transportation just cetera. the filtration was was in about digits, digits single growth and again general infrastructure was and with the the construction medical in double X%; et line

Kurt Yinger

X% how was And overall volume? of price mean I much versus number the

Andrew Wamser

was balanced broken we pretty it mean haven't I out. but that

Kurt Yinger

and you've talk feedback of any increases Okay then --from And products? you've you the whether just initial could price the about on that impact volume on had the any you've hikes seen previous price AMS from announced? sort

Jeffrey Kramer

Yes.

so in think is one users. end go I general So see a increase, that as understanding likes we actually a general discussions the think the materials have increasing, raw our price expect. and No with conversations constructive but I are there you very to price throughout marketplace

of seen on not material impact increases. have We a volumes those because

Kurt Yinger

Okay, helpful. present at of based a in bigger stability LIP on Engineered of us has greater year how visibility And you that's seeing RTL? Papers. pieces and been your maybe update the just some XXXX and with Could then certainly of XXXX you're

Jeffrey Kramer

the from don't think to it's any It's-- I consistent the things time at general in much the We give the marketplace. past. don't see this that typically we guidance been going fairly the we've in overall said Yes. forward in changes like that major year, of trends but particular

view. consistent the keep just would I So

Kurt Yinger

do qualitatively being related weakness in to it is smaller think some and bigger cigarette to able traditional general going you volume heat-not-burn the products? into offset of next as relates opportunity Okay then sort or year

Jeffrey Kramer

interesting always discussion. It's Yes an

a that I We to attractive. find concept. pretty think think marketplace been it's we've fascinating be we and consistent

timing we bit us to the changed it in work. I think to said more outlook It's those. always I we've things we've little think positive a we well think positioned, lumpy, generally would and but is how going be a of we're And be fact, offset question don't around think that. to

the manufacturers need marketplace. the will have part to of is success think products continue their to us the I news tailor in to end-use interesting to continue for because

that development of development that in continues partner part that many because very well cases. are think us to position we we I because are choice

Kurt Yinger

in Okay, you. that's of directly helpful, escalators your tied related some market thank are to much have way price then how pulp? And that EP volumes

Jeffrey Kramer

and the around Yes. it so Quite have paper guidance really businesses lag a of bit cigarette that a is building

Kurt Yinger

to high-level that as And update opportunities how Xx an sub then give page leverage about we seeing? XXXX? general us about comments or maybe just just valuation lastly, could M&A you you're net just And is thinking on you're into turn down the any

Jeffrey Kramer

Yes.

So strategic changed. don't general, investment in has I strategy think just or our

delivering growth for Our in on the cetera. the the overall And is for et cash key focusing corporation focus particularly flows and AMS organic business margins segment.

don't think I that's So changed.

consistently I marketplace. with financing, bond the in we think we even like are where the

we good I need the do acquisitions. So to any news is believe don't

Overall, was we've I the we continue would be to think today. the continue look are our we on see to said, have sandbox do to The evaluations fits so in though more would and to that accretive into marketplace side. at marketplace I as that market that continue screen higher reasonable rather something and there that as the side that. and still will marketplace us strategic if attractive than play the segments we say we

see and with said, for there's we opportunities continue attractive within still think our that cash those. segments, to will of deals. chasing I to screen many interesting But continue

Operator

Jacome question question, from and our And Sidoti next the Dan Co. follow-up from

Your lines now open.

Daniel Jacome

Hi.

one Just more.

capacity. I you targeting I heard new film on -- in new say some you something there specialty products think was Can hear or film you miss did about I guys were AMS I that guess? that

Jeffrey Kramer

No.

EP competitive paper we particular feedback that at and marketplaces had the of that progress. scaled getting filtration investment say Dan, in into time on our our it of utilize commercial synergies and take have bit sharing capital we're other think, there. opportunity than reasons, had a details little for as interesting into We've that significant product. had introduced we had to project our that relationships making advantage the But to we and We that we material some now leverage we believed put is capabilities, to before. marketplace, had making talked this of make We favorable the up the product I more very not have it. a are one and

Daniel Jacome

Right. you've couple especially of lot because That what is that the question year pockets had strength. was my specifically end a of next a last market saw

leave that. it So at I'll

Jeffrey Kramer

would But pretty that's new volume be new. this Yes.

Daniel Jacome

You end mean new market?

Jeffrey Kramer

No. It's the product in a same filtration, new though, yes.

Operator

And I at no over this to Kramer Dr. further back the they time. show would questions call remarks. for to closing turn like Jeff

Jeffrey Kramer

everyone, thank your you Well, actions that I of the And very participation. much a discussed for offset again lot interest quarter, pressures. challenging those of we've in a have SWM. was but It some think

can thank to justify to stakeholders continue We to earn all do future. And their our continue support. we and the of your in support we'll and the for best endeavor interest to

So very thank much. you

Operator

thank participating conclude may And a today's great you conference. all in day. today's This gentlemen, Everyone you disconnect. does for and have Ladies program.