SWM ANNOUNCES FOURTH QUARTER AND FULL YEAR 2018 RESULTS
Schweitzer-Mauduit International, Inc. ("SWM" or the "Company") (NYSE: SWM) reported earnings results for the three month and full year periods ended December 31, 2018.
Fourth Quarter 2018 Financial Results Summary
-Total sales grew 6% to $248.7 million
-GAAP operating profit was $26.8 million, or 10.8% of sales, up 27%; adjusted operating profit was $32.2 million, or 12.9% of sales, up 6%
-GAAP earnings per share was $0.23, and included a $0.50 per share non-cash impairment related to the Company's RTL joint venture in China; Adjusted EPS was $0.90, up 41%
Full Year 2018 Financial Results Summary
-Total sales grew 6% to $1,041.3 million
-GAAP operating profit was $135.0 million, or 13.0% of sales, up 5%; adjusted operating profit was $157.4 million, or 15.1% of sales, down 2%
-GAAP earnings per share was $3.07; Adjusted EPS was $3.48, up 9%
Fourth Quarter and Full Year 2018 Business Highlights and 2019 Outlook
-Fourth quarter AMS segment sales increased 9% with transportation films and filtration products leading the portfolio
-Fourth quarter AMS GAAP and adjusted operating profit margin expanded 160 and 90 basis points, respectively, due to strong sales growth
-Fourth quarter EP segment sales increased 3%; positive price/mix performance more than offset lower volume
-Fourth quarter EP GAAP and adjusted operating profit margins contracted 70 and 330 basis points, respectively, due primarily to higher wood pulp costs
-Full year 2018 Adjusted EPS was $3.48; strong sales across the business and a lower tax rate offset raw material headwinds
-2019 Adjusted EPS guidance is $3.40 to $3.60, reflecting growth in AMS and modest pressure in EP
Dr. Jeff Kramer (photo), Chief Executive Officer, commented, "Strong fourth quarter earnings drove full year 2018 adjusted EPS above our guided range, a significant achievement in light of rapid increases in raw materials and other input costs. Solid sales growth and a favorable tax rate were key factors. In addition to crossing the $1 billion total sales milestone, we continued to advance several strategic growth priorities. In AMS, we completed the Austin site closure during the fourth quarter, a key component of the Conwed synergy plan. In addition, we launched our first international film line in Europe for our transportation business, and recently approved capacity expansions across our global footprint to support additional growth in filtration and transportation. Lastly, we completed initial customer qualifications on our new filtration paper, a synergy between our paper production capabilities in EP and our AMS commercial team. We believe this offering enhances our already strong filtration market presence with an expanded product suite. Within our paper segment, we managed our controllable costs and improved our sales mix by gaining share in cigarette papers, scaling back low-margin printing volumes, and driving growth in more attractive product categories."
"AMS finished 2018 with 6% organic sales growth, with double digit gains in filtration led by nearly 20% growth in our RO water business. We also delivered another year of solid momentum in transportation films, as well as accelerated sales growth in medical products. While segment margins were pressured by anticipated inefficiencies related to the final stage of our site consolidation and higher resin costs, we have completed the facility closure and raised product prices. EP performed well in 2018 in light of considerable pressure from higher wood pulp and energy costs. Segment sales increased nearly 5% with improved mix as well as stability in our cigarette paper volumes despite continued industry attrition."
Dr. Kramer concluded, "Our 2019 Adjusted EPS guidance of $3.40 to $3.60 reflects a combination of expected growth in AMS, modest pressure in EP, and increased investments in IT systems to support our growth activities. Our outlook is also moderated by uncertainties related to global trade risks and growth in Asia. Within AMS, we expect continued sales momentum, more normalized resin costs, and an improved cost structure to more than offset higher freight expenses and growth-related investments. For EP, our 2019 outlook incorporates continued tobacco industry attrition offset with our continued focus on share gains, product mix improvements, innovation, and cost reductions. Consistent with our earnings guidance, we believe our business is well-positioned to deliver another year of more than $100 million of free cash flow. This strong cash generation, coupled with our recent refinancing activities, provide ample liquidity for further organic expansion activities and potential strategic acquisitions to drive sustainable long-term growth."
Fourth Quarter 2018 Financial Results
Advanced Materials & Structures segment sales were $107.8 million, up 9%, with no acquisition benefit in the quarter. Double-digit growth in transportation due to high demand for paint protection films was the largest driver. Filtration sales, particularly for RO water applications, was also a key factor. GAAP operating profit was $10.0 million, up 32%. Adjusted operating profit was $15.4 million, up 16%, with margin expanding 90 basis points to 14.3%. Sales growth and reduced fixed costs from the Austin site closure more than offset certain temporary manufacturing inefficiencies associated with the transfer of volume to our remaining plants and higher resin costs.
Engineered Papers segment sales were $140.9 million, up 3%, with 8% positive price/mix more than offsetting a volume decline of 4% due to shifting away from certain lower margin non-tobacco paper volumes. This, coupled with growth across the cigarette papers portfolio were key factors in sales performance. Currency was a 1% headwind. GAAP operating profit was flat at $27.1 million. Adjusted operating profit was also $27.1 million, down 12%, with adjusted operating profit margin contracting by 330 basis points to 19.2%, due primarily to higher pulp costs, other inflationary pressures, and reduced manufacturing efficiencies as a result of lower volume. Favorable currency movements resulted in a $1.6 million benefit to operating profit due to primarily lower local currency costs at certain sites.
Unallocated GAAP and adjusted expenses were each $10.3 million, down 24%. Adjusted unallocated expenses were 4.1% of total sales, down 170 basis points, due primarily to lower professional service fees and lower deferred compensation, which decreased due to stock price volatility during the quarter.
Consolidated sales were $248.7 million, up 6% (no acquisition benefit). GAAP operating profit was $26.8 million, up 27%, and GAAP operating profit margin was 10.8%. Adjusted operating profit was $32.2 million, up 6% and adjusted operating profit margin was 12.9%, flat with the prior year period. Adjusted EBITDA was $41.8 million, up 3%, and adjusted EBITDA margin was 16.8%, down 40 basis points.
GAAP income was $7.2 million, versus a loss of $27.3 million; this equated to GAAP EPS of $0.23. Adjusted income was $27.1 million, up 39%; this equated to Adjusted EPS of $0.90. Interest expense was $8.1 million, up $1.2 million, reflecting higher effective interest rates as a result of the bond issuance during the third quarter of 2018 offset by lower debt balances. The Company reported a tax rate of 1.6% during the fourth quarter to reflect the Company's full year tax rate of 9.2% (additional details in full year results section below).
The Company's Chinese JVs generated a $0.35 loss for GAAP EPS due to a $0.50 per share non-cash impairment of the Company's stake in an RTL joint venture in China (one of the company's two JVs). The staged investment was made between 2011 and 2014, and while operations were profitable in 2018, this JV has performed below the original long-term financial projections due to market dynamics unique to the Chinese tobacco industry. Excluding the impairment, the Company's Chinese JVs generated $0.14 in Adjusted EPS, up from $0.07 in the prior year period.
Net currency movements had a 1% negative impact on sales but a $1.6 million positive impact on operating profits; the translation impact of net currency movements was negative $0.02 to both GAAP EPS and Adjusted EPS.
Full Year 2018 Financial Results
Advanced Materials & Structures segment sales were $467.9 million, up 8%, including the 3-week partial period benefit from the Conwed acquisition in early 2017. Pro forma (assuming SWM had owned Conwed for the full first quarter of 2017) organic growth was 6%. Strong sales increases in filtration, transportation films, and medical products were key drivers. GAAP operating profit was $49.5 million, up 2%. Adjusted operating profit was $71.7 million, down 5%, with margin contracting 220 basis points to 15.3%. Anticipated manufacturing inefficiencies related to the final stage of the Austin site closure and transition of volume to other sites and higher resin costs were the primary negative factors.
Engineered Papers segment sales were $573.4 million, up 4%, with favorable currency movements of 3%. Overall volume decreased 3%, driven by lower RTL and exiting certain low-margin non-tobacco papers, while cigarette papers were up slightly. Price and mix combined for a 5% sales increase (% changes of volume/price/mix/currency do not sum to sales growth due to rounding). GAAP operating profit was $121.8 million, up 2%. Adjusted operating profit was $122.0 million, down 2%, and adjusted operating profit margin declined 150 basis points to 21.3%. The decrease was primarily driven by higher pulp costs and other inflationary pressures. Favorable currency movements resulted in a $7.9 million benefit to operating profit due to higher average Euro rates compared to 2017 and lower local currency costs at certain sites.
Unallocated GAAP and adjusted expenses were each $36.3 million, down 9%. Adjusted unallocated expenses were 3.5% of total sales, down 60 basis points, due primarily to lower professional service fees and lower deferred compensation, which decreased due to stock price volatility at the end of 2018.
Consolidated sales were $1,041.3 million, up 6%, and 5% on an organic basis (assuming SWM had owned Conwed for the full first quarter of 2017). GAAP operating profit was $135.0 million, up 5%. Adjusted operating profit was $157.4 million, down 2%, and adjusted operating profit margin was 15.1%, down 130 basis points. Adjusted EBITDA was $196.9 million, down 1%, and adjusted EBITDA margin was 18.9%, down 130 basis points.
GAAP income was $94.8 million, up from $34.4 million; this equated to GAAP EPS of $3.07. Adjusted income was $107.2 million, up 10%; this equated to Adjusted EPS of $3.48. Interest expense was $28.2 million, up $1.3 million, reflecting higher effective interest rates as a result of the bond issuance during the third quarter of 2018, offset by lower debt balances. Other income was $10.0 million, up from $0.1 million, and included a $10.2 million gain from the revaluation of a contingent consideration liability related to the Conwed acquisition. The Company reported a full year tax rate of 9.2%, driven mainly by a $13.0 million favorable adjustment related to the 2017 Tax Act in the U.S.; adjusting for this and other favorable net one-time items of $0.6 million, the tax rate was 20.9%, down from 29.6%.
The Chinese JVs generated a $0.37 loss for GAAP EPS due to the $0.50 per share non-cash impairment. Excluding the impairment, the JVs contributed $0.12 to Adjusted EPS, up from $0.08 in the prior year period.
Net currency movements had a 2% positive impact on sales and a $9.0 million positive impact on operating profits; the translation impact of net currency movements was positive $0.04 to both GAAP EPS and Adjusted EPS.
Cash Flow, Debt, & Dividend
Full year 2018 cash provided by operating activities increased to $138.9 million, from $130.9 million. The Company's working capital-related cash outflows were $20.6 million, compared to $11.9 million in 2017, due mainly to higher receivables from sales growth. Capital spending and capitalized software totaled $29.7 million, down $11.0 million, due mainly to timing of capital projects. Free cash flow increased to $109.2 million, from $90.2 million, due to higher operating cash flow and lower capital spending. Year-to-date, the Company has paid dividends to stockholders totaling $53.2 million.
Total debt was $622.1 million on December 31, 2018, down $62.1 million from year end 2017; net debt was $528.3 million on December 31, 2018, down $49.0 million from year end 2017. At the end of the third quarter, the Company issued $350 million of senior unsecured notes and refinanced and extended its credit facility. Pursuant to the debt covenants, the Company's net debt to adjusted EBITDA was approximately 2.5x as of December 31, 2018, down from 3.0x at year-end 2017.
The Company announced a quarterly cash dividend per share to $0.44 per share. The dividend will be payable on March 22, 2019 to stockholders of record as of March 4, 2019.
2019 Financial Outlook
The Company issued 2019 Adjusted EPS guidance of $3.40 to $3.60. This equates to $2.83 to $3.03 of GAAP EPS based on estimates of $0.56 per share of non-cash purchase accounting expenses related to AMS segment acquisitions and $0.01 per share of restructuring expenses that are excluded from Adjusted EPS.
The Company expects 2019 capital expenditures and capitalized software spending of approximately $35 million to $40 million.
(Schweitzer-Mauduit International Inc.)