Q3 2019 Earnings Call
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Please note that's about as being recorded I would now like to turn the conference over to Bill Mccarthy. Please go ahead.
Okay. Thank you and good morning, everyone.
On the call with me today are John O'donnell, Chief Executive Officer, and Bonnie Lind Chief Financial Officer.
John a body will provide comments on this isn't financial results for the most recent quarter well my thoughts on the remainder of the year.
After these prepared remarks, we'll open up the call for questions.
I'll start with a few headlines excluding impacts from currency and the divestiture of our operation in Vermont last December quarterly sales of 232 million were down 6% compared to last year.
Adjusted earnings per share was 95 cents up 25% from 76 cents last year.
GAAP earnings were 84 cents per share and also up from 75 cents a year ago.
Details on adjusting items in a reconciliation to comparable GAAP figures are included in the press release.
Finally, I'll note that our comments today may include forward looking statements actual results could differ from these statements due to uncertainties and risks outlined both on our website and in our FCC filings and with that I'll turn things over to John .
Thank you and good morning, everyone.
However, it's all the many actions our teams have underway Q3 results versus prior year again demonstrate significant progress a number of area.
Operating margins increased by over 250 basis points and are returning to more normalized level.
Earnings grew 25% and operating cash flow was a very solid 33 million up 10 million. That's we relentlessly focus on capital efficiency.
Well, our bottom line increase significantly as we closely manage costs and pricing initiatives revenues reflected weaker market conditions in both segments.
In addition, short term results were negatively impacted by two strategic actions. We've taken as you should expect from our teams.
We're working aggressively across the businesses to address short term issues and position us for a long term success.
In fine paper and packaging commercial print volumes remain under secular pressure and higher value products like ours, even are even more pressure when prices are elevated.
In addition, short term results were negatively impacted by two significant strategic actions taken to strengthen our long term position.
First was the 2018 divestiture of our Vermont, Mel reducing sales by improving our bottom line and second was a more recent change to our market representation, which I'll talk about next.
Our strategy has been to selectively maintained the very best distribution in each market wish her name is the market leader and we believe limited distribution of our well known brands helped support the value of these products and rewards loyalty of our customers. However, one of our historically larger distributors radically change their strategic focus.
Choosing to no longer actively promote premium fine papers.
As a result.
Over the past few quarters, we've seen accelerating declines in sales through this distributor.
Well, we recaptured some of this business through other customers, we recognize the need for more proactive approach to address that's in the third quarter, we formally terminated our support for their market representation and all of our U.S. markets and I've worked actively with our strategically aligned distributors to ensure maximum retention of our branded sales volume.
In addition to the focus on preserving volume our team has done a terrific job executing plans to minimize freight and distribution expense by keeping the majority of our inventory resident in the market with value distribution. Although we anticipate these actions to negatively impact fine paper sales by an added one to two.
2% in the near term, we clearly believe this is the right action to support the health of our fine paper brands and overtly demonstrate that we are committed to a selective distribution strategy.
Well any change of this magnitude is difficult to make our plan show that by actively transitioning relations with printers and designers well have significantly better results in the long run.
In tandem about this change we've continued to keep our capacity aligned with our strong market share and consolidated our footprint with the recent idling of a highest cost fine paper asset rationalizing unproductive skews and transitioning production to paper machines in Wisconsin with available capacity.
As mentioned on the last call. This asset rationalization is expected to generate operational savings of up to a million dollars annually starting in the fourth quarter.
Turning to technical products, almost 60% of our sales are outside the United States with Germany, nearing a recession Europe is clearly struggling nonetheless, and our targeted growth markets digital transfer volumes grew at our long term expectation of 7% and filtration rose two per.
<unk> constant currency.
The biggest topline challenge and technical products. This year has been in backing our most global it economically sensitive category.
Backings comprised more than 70% of the third quarter decline in segments, Allison, mostly due to lower sales in Asia, where volumes continue to be pressured by rising nationalism, a strong U.S. dollar and tariff concerns.
With 15 to 20 million of annual sales in this region.
Still exposure at the competitive environment deteriorates further my belief however is that since the fall off in sales began at the start of this year, we'll lap this decline as we enter 2020.
Our teams are also actively executing long term strategies to drive meaningful growth as we work with customers to satisfy their needs for new or enhanced product solutions.
This continues to be an important strategy for technical products as our innovation efforts have resulted in more than 20% of sales coming from products developed and commercialized in the last five years.
I'd also like to recognize the Optum facility for achieving ISO 14001 certification designation that demonstrates our commitment to environmental stewardship, and it's very important to our global filtration customers.
Looking ahead.
I'm extremely encouraged encouraged by the number of projects currently under development, specifically in product categories like advanced Air filtration and digital transformation.
For example at a recent trade show in Europe , we exhibited a new product Brandon technical that uses proprietary technology, enabling the transfer of digital digital images onto natural fibers, a breakthrough that we believe could double the addressable market up this category.
In both businesses these longer term growth initiatives are balanced with near term actions to improve results.
Our teams are working aggressively to increase by then and improve utilization of our assets. These efforts have included customization of product solution and relentless pursuit of additional business with key customers through our greater supply chain capabilities.
In addition, our teams remain very focused on managing costs and optimizing cash flows as you would expect with near term volume weakness fixed cost absorption is a larger challenge as a result were working to drive out excess costs and improve operational effects efficiencies that every manufacturing location, which.
However, the of this with improved cost during our annual maintenance downs and the third quarter.
In addition, we're actively managing freight and ask you in a cost and delivered improvements in both areas this quarter.
Finally, I noted earlier, we generated substantial cash flow and first second consecutive quarter reduced debt by approximately $20 million further strengthening our balance sheet. These strong cash flows reflected increased operating earnings and careful management of inventories and capital spending.
For the record we expect to retain this working capital improvement going forward and keep our near term annual capital spending within the range of $30 million to $40 million.
As we all know the most resilient improvement comes from a very focused and aligned team that demonstrates the ability to make improvement a daily objective.
I'm very pleased with the progress our teams are making especially with the balance perspective of long and short term actions to ensure our future success.
Talk more about our outlook later in the call, but we'll now turn things over to Bonnie to cover third quarter financial results in detail. Thank you John Hello, everyone.
As you heard we delivered a good bottom line results and translated into strong cash flows in the quarter I'll review financial results for each of our business segments, and then finished with a few comments on corporate items.
Starting with technical products quarterly sales were 132 million compared to 142 million last year.
Currency impact from a weaker euro generate about a third of this shortfall. Excluding this sales were down 5%.
As John mentioned, lower Backings and Asia accounted for most of the decline, though this was partly offset by growth in filtration and digital transfer media as well as benefits from increased selling prices and a higher value mix.
Operating income up 9.5 million in 2019 increased 15% from adjusted income of 8.3 million last year adjusted income in 2018, excluding 2.6 million of net favorable items higher profits in 2019 resulted from lower input.
Higher selling prices and higher value mix that more than offset negative impacts from reduced sales and production volumes and higher SGN.
Moving to find paper and packaging sales of 100 million were down from 113 million last year about half of the decline resulted from the Vermont mill divestiture with the rest due to lower commercial print volume.
Moving impacts from the distributor chains that John discussed in a less favorable mix.
In addition sales benefited from increased selling prices.
Premium packaging sales were down slightly during the quarter, reflecting timing of orders as well as a slowdown in overseas markets. Though this was partly countered by increased sales in our retail channel as a result of excellent performance during the back to school season.
Operating income included about $2 million nonrecurring costs in both periods.
2019. This is mostly for solid rated depreciation on the machine, we idled and third quarter. While in 2018, we recognized additional expense related to that Vermont meld divestiture.
Excluding these items adjusted operating income up 15.5 million in 2019 increased 17% from 13.2 million last year.
This was a result of lower end pot input costs, and higher selling prices that more than offset lower volumes and less favorable mix.
I'd also like that operating margins in this segment are now back in line with their historical mid teen level.
Moving on to corporate items.
All day to day, DNA up 23 million was down half a million dollars from the prior year year to date spending was about 75 million in both years inline with our projected average of $25 million per quarter.
Unallocated corporate M&A was 3.7 million compared with 5.1 million last year.
Excluding nonrecurring costs adjusted corporate expense was three and half million this year down from 4.3 million a year ago.
Quarterly interest expense of $2.8 million declined from 3.2 million in the prior year due to lower outstanding debt and lower average interest rates this year.
Debt at the end of September was 205 million down 19 million in the quarter.
That is all prepayable without penalties or fees with the majority comprised of a 175 million unsecured note. That's due in may of 2021.
Moving on to taxes looking forward, we expect our book rate to be in the low twentys better cash tax rates well below that says we consume prior period R&D credit.
However, our third quarter book rate was only 11% as we reversed a 1.2 million tax reserve following expiration of the statute of limitations for audit.
This low rate contributed seven cents per share to 2019 earnings.
This rate was still higher than the 3% rate and the third quarter of 2018, which benefited from pension contribution excess benefits from dot com and magnified impact from other tax credits.
Our pension and retirement plans remain well funded cash contributions and payments for these plans were 3 million to corridor, which is down from last year, when we accelerated payments to take advantage of a tax rate benefit.
For the full year cash needs are expected to be approximately 15 million as previously communicated.
This is down from over 20 million last year, and it's about 6 million higher than projected 2019 post retirement plan expense.
As already noted cash from operations in the quarter was a very strong 33 million up from 24 million last year. In addition to higher cash earnings we realized benefits from improved working capital and lower pension plan contributions.
Given today's uncertain economic environment, we're closely managing capital spending prioritizing projects that deliver attractive cost savings and continuing to optimize maintenance capex.
Capital spending was 5 million, a third quarter and 14 million year to date, and we expect 2019 full you're spending in the range of 25. This third.
[noise] I'll wrap up by reiterating our commitment to maintaining a strong balance sheet and disciplined capital deployment, we believe that our debt to EBITDA ratio at below two times and the significant borrowing capacity, we have available on our existing facilities provide ample flexibility with Stan economic disrupt.
And well also allowing us to act on compelling acquisition opportunities.
As such opportunities our near term capital allocation priority will continue to be paying down debt, while returning cash to our shareholders through an attractive growing dividend and opportunistic share repurchases.
With that I'll turn it back to you John Thank you Bonnie.
For the few thoughts as we look forward as you might imagine current global market and economic conditions make it difficult to predict future demand than we've seen no indication that the situation will change significantly in the near term.
Our teams are focused on what they can control taking actions to drive added volume, while prudently managing cost and capital.
Looking ahead, our annual filtration maintenance down in Germany will occur in the fourth quarter like it did last year, and we expect normal topline seasonality.
Fourth quarter sales are typically the weakness of the year as year end demand softened some customers.
Managed down their inventories.
We expect this to influence demand in both businesses and in fine paper and packaging will also see short term impact from our change in market representation.
As we've mentioned in past calls this year, we expect to recover at a minimum the 10 million of input cost increases that we did not offset what's selling prices last year.
Clearly on track to deliver against that forecast, which will allow us to enter 2020 on a much improved and more attractive margin profile. So let me wrap up.
In the third quarter, our teams continued to demonstrate progress by increasing margins delivering meaningful improvement in capital efficiencies and cash flows strengthening our balance sheet by paying down debt and providing our shareholders with an attractive dividend.
Our strategies remain sound and are being executed with a disciplined internal decision, making process and catalysts and capabilities for long term growth are in place as we grow infiltration, both gaining share and transportation filtration and expanding into other filtration categories increase our global presence in product portfolio.
So in digital transfer media.
Growing premium packaging to mitigate fine paper volume declines and recover margins as we overcome.
Last year is unprecedented run up and input costs.
Our customer support and competitive standing remains strong and as a global demand recovers, we're well positioned to grow in the capital efficient manner.
From a peace of mind standpoint, our conservative balance sheet meaningful cash generation give us financial strength and flexibility to weather unforeseen economic impacts yet also allow us to act on strategic investment opportunities that can accelerate our growth rate.
And add value.
We appreciate the talent and dedication of employees the strength of our customer relationships and the support of our shareholders. We continue to emerge from a challenging period and unlock the potential of our company. Thank you for your time I'll now open up the call for questions.
We will now begin the question and answer session.
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My first question comes from Steve Shak over with D.A. Davidson. Please go ahead.
Thanks, Scott on the game show.
Good morning, Steve Good morning, So [laughter] in.
In fine papers your sales were down sequentially $7 million EBIT was flat. So obviously margins were up and I'm. Just wondering we attribute that to better productivity, we're falling pulp because it doesn't sound like machine closure relieves a benefit until I guess Q4.
That's that's correct.
The idling of of the paper machine won't impact of tough Q4, we saw an.
Improve cost positions clearly as poll came down the the stickiness of.
Of the pricing actions that we had in place.
Before as this is actually the first quarter, where weve started to see an improvement over our our pulp cost increases from the prior to year. So a lot of has been that and there was some mix enhancement as well don't want to leave out SGN am distribution work because that's a lot of hard work activity so as of right.
Hi, the of of of.
Areas that drove that but for now starting to see the the pricing overcome the Paul it's a big part of the margin restoration.
Yeah, because it occurs to me that you know of your.
Peers, who also by market pulp.
The benefits really only just started to crew and should accelerate so.
Fair to say that.
That would be consistent with your view and the which flow through.
Yes, I think so you would love to believe that as high as it goes up it will come down I don't know amended exercising isn't the same thing is as a minute doing something you enjoy so that's undergoing downside I I believe we're going to.
I have continued improvement in overall pulp.
I also think it's it's a very challenging volume period for most of the markets, where we participate that in itself you rarely see a lot of holding on to price. When when volumes are challenged show. It's gone that's going to be one of the the things that we're going to be very focused on as we move forward in the next six to 12 months.
Okay, and if I heard you correctly, John and you're pretty articulate Guy you said technical products should be lapping most of the headwinds that you encountered in 20, yeah. So does that mean, yeah, we can start to see a modest.
Revenue trajectory.
Some kind of.
Unforeseen currency move that I wouldn't be able to predict.
Yeah, that's that that was my half full guy and I said I expect that from from that standpoint, because I think the impact that Asia had on us the significant impact that the Asia volume had honest this year, we're starting to see that being mitigated.
So with our expectation is that.
They impact that we've had from Asia will likely be completed and we have growth categories. There, we'd as we talked about.
Our transportation filtration as we we rollout the incremental capacity in our digital transfer medias, just doing very very well there as well.
Okay, and just to try and parse out about $10 million.
Tailwind as you recover caution that warrant.
Last year.
Is that.
Separate of pulp and then can you sound like trying sounds like an analyst.
Give us.
And the split between the two segments.
Like how much was captured this year and how would you still yet to come.
So I $10 million I'm referencing is the difference between the increases and the difference in selling price. So last year, we had $32 million increase in pulp and we recover 22 million in price. So that I gave you an io you at this year, we're going to come in with that significant price movements and make sure that we address that Q3.
He was the very first quarter that we saw that impact as a reminder, from a pricing strategy.
Fine paper has a lot of net pricing so they tend to.
Capture there's earlier as they move through and that's why you saw nice margin improvements in the last quarter and again this quarter.
Technical products is a much longer recovery Ron if you will also should expect that.
I would say in this quarter more disproportionately associated too.
Fine paper than tech going forward.
Alright, and then finally, you see Q4's seasonally weakest for technical products, coupled with the <unk>, it's down to Germany. So.
Stay tuned for 2020.
That's that's correct I mean, it to force we're not done yet so we'll run all the way to the end of this one.
It is definitely one of our weaker periods from that standpoint.
And as a reminder, we've always take our down in Germany, and the fourth quarter. So it's just more of a reminder of the activity than than anything else, we expected to be similar to the prior year.
Okay. Thank you John .
Thanks, Steve.
Our next question comes from Jon Tanwanteng with CJS Securities. Please go ahead.
Good morning, guys. Thanks for taking my questions.
Hey, John .
Can you be a little bit more specific in terms of what your expectations for input costs are in Q4 and also your ability to hold prices.
Given the prospect to further moderation what is your next price a change expected to be.
Yes so.
John We've known you for a long time, so you know I hate the pool prognostication mode, but where are definitely on the decline so.
If you look actually if you look at this year, our pulp pricing actually this year and even go into next year will still be higher than we were in 17 2017, So I'm expecting pulp to continue to to add to our margin restoration. We said, we're looking for double digit margins in both of these.
Both of these businesses input costs coming down were down 5 million in the third quarter in the third quarter overall around pricing activities input cost is the largest driver for pricing efforts into the marketplace. So as they are coming down there won't be any announced.
Price increases from that standpoint, and that we manage each of the our overall pricing in accordance with a competitive markets that we participated so there isn't any.
Timing for when will it impact your overall pricing or your ability to retain pricing has to do with a competitive market. We're in and those that we compete against we are committed to ensure that we.
Our AD market levels from a pricing standpoint.
And our expectation going into 2020 is that we'll continue both in the fourth quarter and as we enter into 2020 will continue to enhance and restore the margins that we've historically had in both of these businesses.
Okay got it and it just takes down on that or are you seeing that increased competitive pressure yet.
There's competitors out there everyday John from that standpoint.
No.
I think where we are today, where we're holding underpricing, where it makes a great deal of sensing and in certain areas. Yes. We've had we've had significant pressure on pricing.
But my expectations as net net of all of that margins will continue to enhance fourth quarter and going into next year.
And our pricing activity should outstripping the of the cost.
Elements that we'll see.
Okay, great. Thank you just in terms of freight costs I know does it does have been an issue for you I'm over the past two years as you're looking at 2020 I was just wondering how much do do you pay a marine freight.
Every year and is there an expected impacts from this role than of IMO, 2020, and how that might impact shipping rates.
Yes, I don't know the marine rates off off the top of my head because.
I would tell you right there that it must not be very much because otherwise I'd have it sitting in front of that's up on almost nonexistent in fine paper and very low from what we pay any way going into.
2020, so I don't expect that but as a reminder, because you you mentioned that freight has been a big issue because we were up $8 million with the regulatory changes, we offset to have it.
With our policy changes and we've seeing.
You know rates come more in line why we still think theres, a minimal headwind of and two or two or $3 billion overall than where we were back in 17 before the regulations. The teams have done a nice job of really pressing on the optimization of of that freight.
Okay, Great and then I'm Bonnie I think you mentioned, a timing impact and premium packaging can you size that and if you're expecting that's a rebound.
Well John you know, we typically expect that we have mid to high single digit growth and packaging and yet we didn't have any growth in the third quarter. So I would just say we still have the same annual expectation for it.
Okay, Great what was that your today just a.
She other.
I could probably low single digit.
Yeah low single digit Okay. This is a bit.
This is a business, it's very and we've talked about in the passengers that real technical word lumpy.
You know as it as it follows order from that standpoint, we're trying to make sure that as we communicated our expectations for the category that we take a long term perspective of its growth and for US. The high single digits is clearly where we see this business, okay, great and the body one last one what what should the normalized depreciation and amortization look like as we go into Q4 beyond what you.
I'd love to side.
I'll just accelerated piece.
I wouldn't say left that.
Once you finish this idling right up yet that out I'm thinking 30 Bill.
30, I'm sorry.
Linking third.
Okay, great on annual basis.
Well that was just depreciation and amortization.
Okay great.
And the combined.
I would be another 8 million.
Okay, great. Thanks, a lot guys.
Thanks Scott.
This concludes our question and answer session I would like to turn the conference back over to Bell Mccarthy for any closing remarks.
Okay. Once again, thank you for your time and interest to Neenah today as a reminder, we'll be presenting tomorrow at fared global Industrial conference in Chicago and hope to see some of you there, but as always please reach out to me at anytime if you have questions. Thank you.
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