ALPHARETTA, GA, Feb 15, 2017 -- Schweitzer-Mauduit International, Inc. ("SWM" or the "Company") (NYSE: SWM) reported earnings results for the three month and full year periods ended December 31, 2016.
NOTE: Non-GAAP figures (including all adjusted figures) are reconciled to GAAP measures in tables at the end of this release. All financial measures are from continuing operations and per share data is on a diluted basis unless stated otherwise. All financial and operational comparisons are versus the comparable prior year period unless stated otherwise.
Fourth Quarter Financial Results Summary
Net sales decreased 5.3% to $198.7 million; lower Engineered Papers (EP) segment sales were partially offset by the Argotec acquisition. Excluding Argotec (organic), net sales decreased 10.8%
GAAP EPS was $0.55, down 22.5%; Adjusted EPS was $0.80, down 12.1%
Anticipated declines in high-margin low ignition propensity paper (LIP) and reconstituted tobacco leaf (RTL) volumes offset the benefits of the Argotec acquisition. Non-cash trade name impairment expenses related to rebranding impacted GAAP EPS by $0.39
Full Year Financial Results Summary
Net Sales increased 9.9%, driven by the Argotec acquisition; organic net sales decreased 4.1%
GAAP EPS was $2.70, down 8.8%; Adjusted EPS was $3.26, down 7.1%
Full Year Review & Outlook, Fourth Quarter 2016 Business Highlights
Full year 2016 Adjusted EPS of $3.26 exceeded guidance of $3.15; 2017 Adjusted EPS guidance is $3.15, down slightly versus 2016, as expected accretion from Conwed will likely be offset by RTL weakness
The recently closed Conwed transaction delivers further scale to Advanced Materials & Structures (AMS) and is expected to be SWM's most synergistic acquisition to date, underpinning anticipated near-term segment margin expansion
Fourth quarter Engineered Papers segment net sales decreased 12.5%, due mainly to anticipated double-digit volume declines of high-margin RTL and LIP products
Fourth quarter cigarette paper volumes including the Chinese JV (CTM) decreased 9%, reconstituted tobacco volumes including the Chinese JV (CTS) decreased 20%, and non-tobacco paper volumes increased 25%
EP segment GAAP and adjusted operating profit margins expanded 250 and 60 basis points, respectively, during the fourth quarter; strong growth in certain niche products and solid overall cost performance offset the expected RTL and LIP weakness
Fourth quarter AMS segment net sales increased 14.0%; organic net sales decreased 3.4%, with negative currency translation impacts accounting for full decline
AMS segment GAAP operating profit margin was negative in the fourth quarter due to non-cash trade name impairment expenses related to rebranding, which more than offset the contribution from Argotec; adjusted operating profit margin expanded 170 basis points due primarily to Argotec
Frederic Villoutreix, Chairman of the Board and Chief Executive Officer, commented, "We closed 2016 on a very positive note regarding our financial performance and the announced acquisition of Conwed. Despite lower sales and earnings compared to a very strong fourth quarter last year, our results were better than expected due to continued strong execution within Engineered Papers. As a result, full year Adjusted EPS was $3.26, exceeding our guidance of $3.15. For the full year, EP performed significantly better than we anticipated, Argotec hit our accretion target, and currency translation was less impactful than originally assumed, while DelStar and our Chinese JVs performed below our expectations. In 2016, we generated approximately $100 million of free cash flow and announced another 5% dividend increase, building our track record for dividend growth and demonstrating our commitment to a balanced capital allocation strategy."
"Regarding our 2017 guidance for slightly lower Adjusted EPS, our primary challenge is that expected Conwed accretion will likely be offset by declines in RTL. Certain customer reblending decisions expected to impact volumes at our French mill materialized in 2016 but the full annualized effect will continue to impact us in 2017. In addition, we benefited from accelerated year-end RTL orders from other customers, creating a more difficult year-over-year comparison in 2017. Another key element of our strong 2016 finish was our high-margin wrapper and binder reconstituted tobacco products, which serve the US cigar market. The stronger-than-expected recent results from this niche business may not be sustainable, and we have assumed a reversal of this strength in our outlook. There is potential upside to our guidance should this favorable trend continue and strong recent EP segment cost performance momentum carry into 2017. Though visibility for a long-term rebound in RTL is limited, our best indications point to a stabilization of the business beyond 2017, which could reduce volatility in our results. Other expected puts and takes that factor into our guidance include continued growth of Argotec, improved results from DelStar, and growth of the Chinese JVs, offset by lower LIP royalties, higher taxes, and the negative earnings impact of a new interest rate swap that de-risks approximately half of our floating rate debt."
Mr. Villoutreix concluded, "Our multi-year strategy of leveraging the strong cash flows from our tobacco-related businesses and balance sheet capacity to diversify SWM into growth-oriented end-markets and specialty applications has dramatically shifted the composition of our overall business. Total non-tobacco sales are expected to be approximately 50% of our business this year, up from about 5% in 2013. The addition of Conwed's specialty netting business not only advances our diversification efforts, but represents an opportunity to deliver more substantial synergy value than our previous transactions with a $10 million run-rate target by the end of 2018. Although our transformation is not complete, given AMS's relative size and its potential to deliver solid long-term sales growth and margin expansion, we believe we are nearing our transformation goal of structurally re-positioning the company to deliver long-term earnings growth."
Segment Financial Highlights
Allison Aden, Chief Financial Officer, commented, "Expected volume declines in our LIP and RTL products drove lower fourth quarter sales and operating profit in Engineered Papers. Total cigarette paper sales volumes, including our Chinese JV, decreased 9% in the fourth quarter due to a double-digit LIP decline. We faced a difficult comparison versus a year ago when customers were building LIP inventories. Reconstituted tobacco sales volumes, including our Chinese JV, were down 20% in the fourth quarter. RTL volumes performed better than we expected during the fourth quarter and full year, in part due to favorable timing of certain orders and strength in niche products. Despite lower volumes across key product lines, segment margins expanded in the fourth quarter and full year due to strong operational execution and cost management. Our Chinese joint ventures contributed $0.08 to fourth quarter Adjusted EPS, however their full year contribution of $0.16 was well below our expectations."
"Advanced Materials & Structures segment fourth quarter net sales declined about 3% excluding Argotec, with negative currency translation impacts accounting for the full decline. These results reflect continued pruning of low-margin industrial sales and soft water filtration sales offset by growth in other filtration applications. Excluding acquisitions and currency impacts, full year sales were down less than 2% with industrial sales exits accounting for more than the full decline. Argotec's surface protection film sales continued to grow in the fourth quarter, and will be included in organic sales growth going forward. Fourth quarter adjusted segment operating margin improved, reflecting the addition of Argotec and lower resin costs."
Fourth Quarter 2016 Financial Results
Total net sales were $198.7 million, down 5.3%. The Argotec acquisition contributed $9.2 million of incremental net sales, and favorable net currency impacts resulted in an approximately $2.2 million benefit. Excluding currency benefits, net sales decreased 6.3%, and 12.0% excluding the Argotec acquisition, due primarily to volume declines in tobacco-related products.
Engineered Papers segment net sales were $133.6 million, down 12.5%, and down 14.7% excluding currency benefits. Negative volume trends in RTL and LIP products, partially offset by non-tobacco volume growth, were the primary factors contributing to the net sales decline. Advanced Materials & Structures segment net sales were $65.1 million, up 14.0%, including the Argotec acquisition. Organic AMS segment net sales decreased 3.4%, but were flat excluding negative currency impacts. Growth in liquid and air filtration sales was offset by declines in water filtration and industrial sales.
GAAP operating profit was $6.2 million, down $18.5 million, and GAAP operating profit margin was 3.1%, down 870 basis points. Non-cash trade name impairment expense of $20.7 million related to rebranding (discussed below) was the primary driver of the decline. Adjusted operating profit was $30.9 million, down $1.8 million, and adjusted operating profit margin was 15.6%, flat with last year. The Company benefited from operational and cost improvements and favorable net currency movements in the EP segment, incremental profits from the Argotec acquisition, and lower input costs in the AMS segment. These positive factors were offset by significantly lower LIP and RTL volumes.
GAAP income was $17.0 million, down $4.6 million; this equated to GAAP EPS of $0.55, down $0.16. Non-cash trade name impairment expense of $12.0 million after-tax, or $0.39 of GAAP EPS, accounted for the decline. Adjusted income was $24.2 million, down $3.5 million; this equated to Adjusted EPS of $0.80, down $0.11. Interest expense was $4.0 million, down $0.4 million. Income tax benefit was $12.5 million due to the impact of impairment expenses and discrete one-time benefits related to favorable deferred tax movements and income tax valuation allowances. The Company's Chinese JVs together contributed $0.08 to GAAP EPS and Adjusted EPS, flat versus last year. Translation impact of net currency movements was negative $0.01 to both GAAP EPS and Adjusted EPS.
Regarding items included in GAAP operating profit, income, and EPS, but excluded from adjusted operating profit, income, and EPS, the Company had several material items. Restructuring and impairment expenses were $0.42 per share, up $0.30. During the fourth quarter, the Company made strategic decisions to rebrand the DelStar, Argotec and Conwed businesses in 2017 as SWM while retaining the legacy product level brand names for marketplace continuity. As a result, the Company recognized impairment expenses related to certain corporate level trade names. The non-cash expenses related to this impairment equated to a GAAP EPS impact of $0.39. Purchase accounting expenses were $0.06 per share, down $0.02. In addition, GAAP EPS included a $0.23 per share net positive impact of discrete items related to deferred tax movements and income tax valuation allowances which were excluded from Adjusted EPS.
Full Year 2016 Financial Results
Total net sales were $839.9 million, up 9.9%. The Argotec acquisition contributed $106.5 million of incremental net sales and net currency movements had no impact. Net sales decreased 4.1% excluding the Argotec acquisition.
Engineered Papers segment net sales were $559.3 million, down 4.2%, and down 4.8% excluding currency benefits. Negative volume trends in RTL and LIP products, and associated negative mix impacts, were partially offset by conventional cigarette and non-tobacco paper volume growth. Advanced Materials & Structures segment net sales were $280.6 million, up 55.7%, including the Argotec acquisition. Organic AMS segment net sales decreased 3.9%, or 1.7% excluding negative currency translation impacts. Key factors included the exit of low-margin industrial products and a decline in certain air filtration products related to one customer's new product launch during 2015, which offset growth in other filtration end-markets.
GAAP operating profit was $106.1 million up $3.1 million, and GAAP operating profit margin was 12.6%, down 90 basis points. Non-cash trade name impairment expense of $20.7 million related to rebranding had a significant impact on GAAP operating profit. Adjusted operating profit was $144.0 million, up $18.9 million, and adjusted operating profit margin was 17.1%, up 70 basis points. The Company benefited from operational and cost improvements and favorable net currency movements in the EP segment, and incremental profits from the Argotec acquisition. These positive factors were offset by significantly lower LIP and RTL volumes and associated negative mix impacts in the EP segment, as well as higher corporate costs.
GAAP income was $82.8 million, down $7.7 million; this equated to GAAP EPS of $2.70, down $0.26. Non-cash trade name impairment expense of $12.0 million after tax, or $0.39 of GAAP EPS was the primary driver of the decline. Adjusted income was $99.5 million, down $7.6 million; this equated to Adjusted EPS of $3.26, down $0.25. Interest expense was $16.6 million, up $6.9 million due to higher debt related to the Argotec acquisition. Income tax expense was $15.4 million, down $6.2 million. The effective income tax rate was 16.5%, down from 20.5%, due to the impact of impairment expenses and discrete one-time benefits related to favorable deferred tax movements and income tax valuation allowances. The Company's Chinese JVs together contributed $0.16 to GAAP EPS and Adjusted EPS, down $0.06. The negative translation impact of net currency movements was $0.04 to both GAAP and Adjusted EPS.
Regarding items included in GAAP operating profit, income and EPS, but excluded from adjusted operating profit, income, and EPS, the Company had several material items. Restructuring and impairment expenses were $0.51 per share, up $0.12, as the trade name impairment was partially offset by lower restructuring costs in the Engineered Papers segment. Purchase accounting expenses, were $0.25 per share, up $0.09 due to the amortization of intangible assets associated with the Argotec acquisition. In addition, GAAP EPS included a $0.20 per share net positive impact of discrete items related to deferred tax movements and income tax valuation allowances offset by one-time tax expenses, which were excluded from Adjusted EPS.
Cash Flow, Debt, and Dividend
Full year 2016 cash provided by operating activities was $129.7 million, down $14.9 million. The Company's working capital-related cash outflows were $11.0 million, versus inflows in 2015 of $12.8 million, primarily due to decreases in income taxes payable. Capital spending was $27.8 million, up $3.6 million. Capitalized software spending was $2.8 million, up $1.9 million. Free Cash Flow was $99.1 million, down $20.4 million. In 2016, the Company paid $49.4 million in dividends to shareholders.
Net debt was $333.0 million on December 31, 2016, versus $385.0 million at December 31, 2015. 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 2.0x as of December 31, 2016. Following the closing of the Conwed acquisition in mid-January 2017, this leverage ratio was approximately 3.2x.
The Company announced that a quarterly cash dividend of $0.42 per share will be payable on April 7, 2017 to stockholders of record as of March 10, 2017.
2017 Financial Outlook
The Company issued annual guidance of $3.15 for 2017E Adjusted Diluted Earnings Per Share from Continuing Operations. Excluded from guidance are purchase accounting expenses such as non-cash amortization expenses associated with intangible assets in the AMS segment, restructuring and impairment expenses, and potential transaction costs associated with future acquisitions. Following completion of purchase accounting expense adjustments related to the Conwed acquisition, the Company will provide a reconciliation from Adjusted EPS guidance to GAAP in conjunction with the first quarter 2017 earnings release.
The Company expects 2017 capital expenditures and capitalized software spending to total approximately $35 million.
SWM will hold a conference call to review fourth quarter and full year 2016 results with investors and analysts at 8:30 a.m. Eastern time on Thursday, February 16, 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 solutions and advanced materials for a variety of industries. Historically, SWM primarily served the tobacco industry, which remains a key focus. SWM also manufactures specialty papers for other applications and is executing a strategic transformation to diversify its product portfolio. SWM's Advanced Materials & Structures segment, which focuses on resin-based rolled goods, includes DelStar Technologies, acquired in 2013, Argotec in late 2015, and other recent acquisitions. These acquisitions expanded the Company's product portfolio and end segments served to include filtration, surface protection, medical and industrials. SWM and its subsidiaries conduct business in over 90 countries and employ approximately 3,000 people worldwide, with operations in the United States, United Kingdom, Canada, France, Luxembourg, Russia, Brazil, Poland and China, including two joint ventures. For further information, please visit SWM's Web site at www.swmintl.com.
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