Q1 2020 Earnings Call

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Good morning, or technology director of Investor Relations.

Thank you for joining us.

First quarter 2020, Berman result, before we begin I'd like to remind as a comment.

This call include forward looking statements.

Actual results may differ materially from the results adjusted by these comments for a number of results discuss in more detail and our securities and Exchange Commission filings.

Including our quarterly reports on form 10-Q, and our annual report on form 10-K.

In particular, the exempt or what's the Kogas 19 pandemic ultimately impacts our business is uncertain and depends on numerous evolving factors, which are difficult to predict including the duration and scope of the pandemic and of accident.

Stuart.

Some financial measures discussed during this call our non-GAAP financial measures reconciliations of these measures are the closest GAAP measures are included in the appendix of this presentation and earnings release.

Stated otherwise financial and operational metric comparisons were to the prior year period and relates to continuing operations.

This presentation and the earnings release are available on the Investor Relations section of our website Www Dot Fwm high NPL Dotcom I'll now turn the call over to Jeff.

Thank you Mark and good morning, everyone.

Clearly this isn't unusual and challenging time with the entire world dealing with the various impacts of the Corona virus pandemic.

So we will spend much of our time today on interpreting impacts to our people operations end markets and financials.

I'd like to begin by expressing appreciation on behalf of both the SW I'm executive team and the board of directors for employees across the world for their incredible dedication and efforts in recent months.

Acted overall, rather that with more than 40% of our sales to the tobacco industry.

Our presence in replenishment driven filtration markets and I'll growing medical business, we believe that a large portion of our <unk> our sales should be resilience in the face of continuing economic turbulence encoded 19 related demand impacts.

In terms of financials I think that in time such as these it is important to ensure the investment community as well as our employees and customers that S.W.M. is on sound flooding.

And you will elaborate in a few minutes, but we have spent significant effort Prussia testing a series of economic scenarios.

Given our portfolio.

Global operating capabilities and cost reduction activities are models currently show that we have sufficient cash flows and ready access to additional funds if needed to provide though.

Where did he needed to execute operating plants and maintain our capital allocation strategies, including our dividends.

What's that said these are unprecedented times and prudent dictates that the future is still uncertain enough that we have decided to withdraw annual guidance.

Moved to a quarterly results.

All things considered 2020 got off to a solid start with adjusted E.P.S., increasing 25%, which exceeded our expectations.

Profit growth was anchored by a strong quarter for our paper business as sales grew and marches increase versus last year.

And M.S., we had broad.

Strength across most of the portfolio, though our transportation. So segment was impacted by the white stay at home orders that disrupted the global auto market.

Across the business raw material costs, what favorable and we would expect them to remain that way as global economic weakness shouldn't limit upside movements of our input costs.

We also closed on our previously announced tech right and try and acquisition, which were simplicity I'll be referring to as tech are going forward.

I cannot imagine a more unusual circumstances circumstances under which to welcome this new business to S.W.M. and I want to commend the tech were team on managing this transition and maintaining operations with minimal disruption.

We remain excited about this acquisition and the long term value we can create together.

For M.S. sales increased two per cent driven by growth across most n. markets and the tech or acquisition, which closed in mid March.

In the core A.M.S. portfolio organic revenues declined a modest 3%.

Drop off in transportation sales more than offset solid performance infiltration.

Infrastructure in construction medical and industrial cells, which also a positive organic growth.

Overall segment adjusted <unk> operating profit contract is slightly with favorable rising costs offering a partial offset to the lowest sales of higher margin transportation films.

As noted our overall M.S. portfolio did well.

Medical was off fastest growing and market during the quarter and is particularly relevant in this environment.

This is an area, where we produced many products, which are helping to serve the healthcare industry and it's a battle against the Corona virus.

For example.

<unk> no phone materials by in 95 face masks and even have to d. bottleneck in our lines by over 20% and running 24, seven we are still constrained versus the number of orders we have on the books.

We also produce a variety of hospital neck, netting products, which are in high demand such as films and Nettings, using making traditional medical masks betting gallons instrument packaging et cetera.

Also note that while at the man Perked up in March due to the Corona virus, we were or otherwise off to a strong stark prior to that uptick with games and several niche product areas.

We expect a medical business to remain healthy for the remainder of the year.

Filtration sales grew and we anticipate continued gains in 2020 as demand remains intact across many of the sub segments that make up this category.

For infrastructure and construction, we had solid first quarter growth.

But this area is likely to experience soft in your turns demand as a slowing economy wrestles with increased levels of potential stimulus.

I would transportation film business with the most impacted part of our portfolio.

The disruption of the global auto and market combined with increasing Shelton place orders as well as some manufacturing interruptions that class Lemonade just have had a significant effect.

After a strong start we started to see impacts and late March really early effects in China started to show.

Our expectation is to continued near term pressure with a great a profit impact in the second quarter at the virus impacts customers in Europe in North America.

What's that said I'll learn <unk> long term expectations for transportation films remains positive.

Well preliminary we are already starting to see some positive signs return in China.

We expect us to remain a highly strategic part of our portfolio that can drive organic growth in March and expansion given the potential to steadily increased the low global consumer penetration rates of pay protection films.

Given tech where is new to our portfolio here's some additional color on expectations in the current environment.

About a quarter of its business is in the medical space, which we view is highly attractive, particularly in this environment.

Tech, where does also have a transportation business, which is likely to be soft in the near term.

But again with a positive long term outlook.

The remainder of the business goes into digital printing electronics, and other industrial and markets.

We are seeing increased demand from the medical side and the tech were team is working diligently to reallocate converting encoding resources. So we can supply these emerging pockets of strength.

Bottom line, many A.M.S.N. markets are performing well given the economic uncertainty there'll be an offset by meaningful headwinds for a higher margin transportation films.

Switching out an engineer papers, we had a strong first quarter were sales up 1%, what 3% x. currency and good marching performance.

Volume was down 4%, reflecting only the typical contraction of the tobacco industry has it demonstrates it's relative resilience to the covert 19 environments.

We continually effectively offset that pressure with a focus on a higher value products as price mixed combined for 7% benefit in the quarter.

And also.

With our ongoing cost reduction efforts.

Specialty recon products like heat not burning wrapper and bind to where the primary positive mixed factors.

We are also seeing continued favor a billion pulp costs, which combined with the above factors drove double digit segment profit growth.

As noted we believe R.E.P. business is relatively insulated from the covert 19 backdrop and currently are optimistic that are full year results will not be overly impacted.

Given the demand and general concerns about global supply chains, our customers may have pulled some additional orders into the first quarter and we'll need to monitor fluctuations as inventories of balance throughout the year.

In addition, the consumer pantry stocking maybe another factor that creates some variations in our quarterly results.

All told we don't believe there will be a fundamental change in typical market demand dynamics.

Lastly, I would note that E.P. generate strong cash flows, giving us increase confidence about overall liquidity.

What's that altering the call over to Andy.

Thank you Jeff.

Beginning with our segments M.S. sales increased 2%, but we're down 3%, excluding the tech or acquisition.

Check her only added 5.5 million of sales [laughter] has to be closed on acquisition on March 13th.

Mentioned, while organic sales declined 3%.

This results with skewed by the decline and after market transportation films, which offset growth and the rest of the portfolio.

The decline any higher margin products were responsible for the decline and segment adjusted operating profit 0.7 million or 4%.

The associative Boston transmitted in transportation film for profits exceeded the benefits of growth in other and markets and lower rather than costs.

E.P. segments sales increased 1% or 3% x. currency with positive price mix, 7% more than compensating for the anticipated lower volumes.

While we did have some <unk> 19 related disruptions those accepts costs were more than offset by or improved mix other cost reduction activities and lower wood pulp costs, which together drove 330 basis points of margin expansion.

First quarter paper segment results were above plan, but we believe some future orders were pulled forward has certain customers planned for potential supply chain disruptions.

As reference the first quarter impact other production inefficiencies was not material.

We were forced to incur some downtime while they knew some products to other lines in locations.

Just that our supply chain and modified processes, while we implemented additional hygiene and C.D. protocols.

However, given the current environment, we would caveat that any prolonged or additional production disruptions at our key sites.

In a more material impact.

Unallocated costs were flat with prior year.

The stock market volatility created a benefit deferred compensation expenses, but these were partially offset by 1.5 million of transaction costs associated with the <unk> acquisition and the timing of other administrative costs.

We still expect unallocated costs to trend toward the mid 40 million dollar level for the whole year, including the tech right transaction expenses.

On a consolidated basis sales increased 1% and adjusted operating profit and eat dot increased 12% and 10% respectively.

First quarter 2020 gap E.T.S. increased 29% 72 cents and adjusted E.P.S. increased 25% to 85 cents.

Operating profit growth from the E.P. segment drove the increase.

We note that while interest expense was lower versus prior year. Most of the first quarter did not reflect the higher debt outstanding due to the closing or the tech rubber acquisition.

S future quarters are projected it to be higher than the first quarter Runrate.

Our tax rate embedded in adjusted E.T.S. was 21.3% down nominally versus prior year.

Although our first quarter results were strong and exceeded our internal expectations. We have limited visibility on the remainder of 2020 and have accordingly withdrawn are in no guidance.

We've discussed our portfolio is diversified when we expect the majority of our sales to be relatively insulated from coded 19 related economic challenges.

However, as Jeff discussed some of our products are expected to be more significantly impacted in the coming quarters.

We've conducted girl financial analysis and based on what we believe are the most likely scenarios, we still expect to deliver solid profitability in cash flow currently have no intention to alter our capital allocation strategy, including our dividends.

Ideally you'd be in position to offer some financial guidance on our second quarter call in early August but the situation remains fluid in our ability to work with customers to accurately forecast and plan is hindered due to Kobe 19.

In the meantime, we Wanna sure all of our stakeholders that we are in a solid financial position.

I'll be typically do not review our debt structure and liquidity in detail during these calls.

You want to provide a breakdown of our debt structure and liquidity given increased investor interest in this area.

First we finished a quarter with 127 million cash on hand.

In addition, we have to 284 million of availability auto 500 million dollar revolving credit facility.

We have total liquidity approximately $411 million.

He said our current sensitivity analysis around like these scenarios, we believe our cash generation from operations along with the cash on hand, coupled with availability on a revolver purchasing strong financial position to fund or operations vestments and dividends.

Our net debt at the end of the first quarter with 628 million Amherst selected your end level 440 million and the marks 2020 draw our credit facility to fund the tech or acquisition.

Our total bet consist of mainly three components.

First $500 million revolving credit facility with 212 million outstanding which is due in 2023.

Represents our nearest that maturity.

Second we have 197 million outstanding and our term lungs do in 2025.

And lastly, we have 350 million at senior note do in 2026.

The late 2018 bond issuance and renewal of our credit facility proved to be a timely news.

Adam liquidity and extended that maturity schedule has created significant flexibility and the thing.

Visual time.

Leverage at the end up first quarter was 2.7 times net debt to adjust to leave it down in line for we communicated <unk> would be when we first announced the tech or deal in February.

Are 2020, Max leverage Covenant, it's five times that debt to adjusted EBITDA.

We have ample covenant cushion.

Currently do not proceed any competent compliance issues.

Last week on capital spending a cat back from the first cool in the first quarter of 8 million annual wise is below our initial guided range of 35 to 40 million I'll be at mostly due to timing.

We consider certain growth projects as discretionary cap x. and coupled with additional costs actions provide drivers to poll should we deem more conservative actions are required.

End of changing circumstances.

Now back to Jeff.

To wrap up.

<unk> a few key points before taking your questions.

We know this is a challenging time with uncertainty across our stakeholder groups.

Versus an organization, we remains fully committed to ensuring our employees safety.

We have shown that we can comply with local government guidelines, where we operate.

Maintaining best practices in terms of health and safety measures, while minimizing disruptions to our customers.

We've done a good job to date and I think a worldwide teams for their professional dedication demonstrating to the marketplace that S.W. is a flexible innovative and reliable supplier of choice.

Lastly, because Andy mentioned are balance sheet and liquidity position or a healthy.

All we have chosen to withdraw guidance due to lack of near term visibility. We are confident we remain solidly profitable with strong cash flow.

Looking beyond the toughest sledding I hadn't the near term. We also remained focused on strategically positioning ourselves for success in the long talked in the long run.

During these unusual times, there may be opportunities to distinguish S.W.M. versus competitors, who might not prove as nimble financially secure or have as flexible global supply chains.

Furthermore, we have the capability to advance several strategic initiatives. During this time, including new project about new product development that could serve to accelerate outgrowth wants to global economy stabilizes.

We firmly believe that S.W.M. is well positioned to successfully whether this storm.

And while we were not be unaffected are diversified portfolio should offer some protection from shop demand declines in many areas of the economy.

We appreciate your continued support and interest.

That concludes our remarks to me or police open the line for questions.

Yeah.

Ask a question.

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Fine, while we compatibility roster.

And your first question cost front on line of speech to check how far we can be a.

<unk>.

Well I when [noise].

Good morning.

So let's start first with a couple of questions on M.S. everything seems really solid except for the transportation films I'm. Just wondering are the margins there substantially higher than elsewhere in that segment, perhaps in accessing 20%.

So I I would say that that is one of a higher margin products you know within the M.S. portfolio. So I think that's there to say.

And you know.

One thing I would echo, though it is or leads to that businesses that you know why we do for C. you know some challenges in the transportation film products area. You know we are very bullish on that product portfolio over the longer term. The other thing I would just what highlight is you know that the drop that we've seen in the automotive.

Ah industry here of the past couple of months you know besides you saw it in China in the first quarter when starting to a little bit here in North America.

That you know our expectation is that this business will out perform you know whatever we're seeing on in terms of global sales. This isn't aftermarket product. So it's not you know just tied to Oh, we m.'s and so that you know if you look at historically, we've grown that business hi single digits, you know even doubled interest in.

Not far environment. So you know we are very comfortable that we will out perform you know what we're seeing you know I think from these headline numbers will see in the automotive environment.

Sure, Thank you and and sticking with the M.S. I wanted to ask a little bit but filtration can you help us think of the split between water and then processed air and is it fair to assume that water is stable.

Things that are.

That are <unk> to process might be a bit more sick cool.

Yeah. So this is Jeff Steve water is probably about 50% of the portfolio and the remainder is split between you know process automotive filtration and then air filtration. So we have a abroad diversity markets.

We're seeing water filtration pretty pretty pretty stable.

We're watching it's a lot of a lot of that businesses replenishment and that needs to happen no matter, what we're watching closely to see if any of the big new projects gets delayed we haven't heard much in you know pro or con around that but we're watching that on the process filtration side that seems real solid we have seen some weakness in the automotive side and after it.

<unk> remain strong.

Okay, and while you're not providing guidance there is pretty substantial seasonality en masse and you still expect the second and third quarter to be seasonally better.

Well.

We do expect a second quarter to be you know probably the most impacted so you know historically within the second third quarter or the or the best quarters within a amass.

You know second quarter, I think you know could be relatively in line with maybe the first quarter. So I don't think it you have to the big bomb, but you know the third quarter and fourth quarter made to be seen.

Yeah, I mean, it's the state it's gonna be hard for us to really give you some guidance around that because I don't I. You know this is not a typical world and so I think anybody that that shares that they really have a good complete feel of how you know normal cyclicality would show I think it's gonna be stretching it a little bit second.

And third quarter tend to be our strongest we also those things the transportation will be hit a little harder on the second quarter. So that might all set that typical strange, but I do want to highlight that we continue to believe that the majority of the court folio in M.S. is very resistant to a lot of the trends that we're seeing.

And just to reiterate I mean, you know four to five segments did see you know growth in the first quarter. So again, it's a diversified portfolio.

Great for fair enough. This is a very unusual time k. switching to engineered paper do you think the price mixed benefits that you're enjoying Q1 can be maintained in that you can you know maintain that price that you captured.

Yes, we do I mean, if we talked about even you know going into this year. You know we do expect you know volume you know to be down in north in line with a typical attrition, but yeah, we'd get x. that price next to offset that so.

Yeah, we're we're seem good mix and continue to a good mix. The one thing until I would caviar is that you know we do have one facility that is closed in New York.

And they are responsible for you know part of our wrapper and binder product. So.

You know the expectation is that that would be up and running on here at some point in in May.

But you know clearly April we'll have some impacts to that you know to the second quarter, but you know once at the city's up and running.

That you're supposed to be sprinting, so and you know to <unk> to make up for some lost volume. So it made me think well we can make up for the year, but it's a great facility and a great team there on to another h. to get back to work.

Great. Okay, <unk>, so considering that cope it appears to be particularly hired on those with preexisting conditions, you'd think that the attrition and smoking might accelerate.

No I mean, we haven't seen any indication about that if it's an interesting point, but we've actually seem very strong sales overall in some of our markets around that so that that'll be an interesting thing to watch, but we haven't seen that and I haven't seen any of our customers report that there's there's sensing that.

Either.

Oh, we admire their dedication okay. Finally last one glad you got detector deals done.

And I should think that integrating it in this cove environment is.

Challenging says he can't or shouldn't be physically together, so how's that going and how are you dealing with it.

Yeah, you know interestingly, it's going really well I I've been incredibly impressed how our teams have really been able to modify and work by video conferencing <unk> calls, we're using some augmented reality technology and locations to help our engineers be able to consult we also didn't have a lot.

Physical integration that we needed to achieve with the tech were acquisition. So there wasn't a need to have as much of that you know did you might see in cost reductions et cetera happening and so the tech or team is really stepped up they're doing a great job and actually I haven't seen us meet Miss a beat on it.

The honest.

Okay, well, thanks, guys stay safe.

Thank you. Thank you.

Your next question.

That's crazy.

<unk>.

Company.

Good morning, Thanks for taking my questions and a nice quarters.

I was just one of the wondering if maybe you can I I know, it's obviously very difficult environment, but maybe just talk about I don't know if it's if maybe conversations that maybe change cross and markets during the quarter and how that maybe starting in April if there was any any major changes just sounds like maybe you know you had a much stronger beginning.

Did you see a slowdown going into Q3 or a cue <unk> April month, and then you know maybe just a little bit of high later in color I'm see it seems like medical do fine, but there's just on the other and Marcus <unk>.

Yeah, I think if you look at our corridor. The first two months were strong across all the segments and to be honest I think we only segments that really saw material change was our transportation films and only some of the sub segments in there because you know that's a broad category that includes optical films are et cetera.

And it really was more round the surface protection parts of that marketplace. We had big sales in China. So you can imagine you know was China was wrestling through this and then going through their shuts down there now reopening so that started to show up and it was really only in March that we saw that show up as I indicated we're actually seeing.

Encouraging activities in China, you know, we just installed our brand new surface protection line. There. So we now can manufacturing these materials worldwide again, some evidence of the kind of supply chain investments that we continue to make.

And the qualifications since this says impact has been accelerating mass so we're watching that closely.

But as you can imagine this isn't penetration market and so the markets in Europe, which have been severely impacted in the United States. We expect some weakness to continue certainly in the second quarter and then this now you're starting to see some of these openings happen again, we're going to have to watch cautiously to see if we see the.

The same kind of evidence that we're seeing in China happened throughout you know Europe and North America.

And maybe just to add to that kind of just.

Look at the portfolio in General you know all that you would you know we wouldn't say that it's f. mentions in about two thirds of our sales are coming from tobacco.

Filtration and medical so we do relatively.

Insulated so we really didn't see much change my bears some are trying to trying to to be solved in the first quarter.

<unk>, we have some pockets maybe that a little bit you know some that are a little bit down now, we generally do that and more of a a G.D.P. you know type of portfolio, but given where G.D.P. isn't too too I think it may exceed you know g., yeah, let's talk with nothing track complete.

[laughter] sure no and then infrastructure construction you know did have really a solid start I'd say two you know two Q1 I think it's fair to say <unk> said in the comments you know that that could be it could get soft as we go throughout the year, but you know in general it's kind of taking a step back and just sort of reiterate the point that yeah.

Two thirds of our portfolio is you know pretty insulated from this but it's not to say that we're not watching everything like a hawk and you know we are doing regular sales channel checks you mean, Donna on a weekly basis to make sure that we're on top of it.

Great great.

Even if you just talk about any any profit profile changes due to maybe supply chain changes or you know the impact the safety measures around so that you know how does that change kind of the the manufacturing process. You don't mind. Yeah. You know, we had I'm really proud of operation C. and a half Italian.

So you can imagine early on in this epidemic as it started to roll across.

We had different impacts in different regions around the world, but the team has actually been able to move products. You know start up all the lines moved lines et cetera.

And so is is Andy had said in his section we had we had some interruptions as early on in the phase where we wanted to make sure. We were doing the right hygiene, social distancing to be able to maintain and we moved some of these but they are they haven't been material disruptions in terms of costing profitability et cetera. So.

You know I, I think we're well positioned and I and I would say that across all our product lines, we haven't seen material change.

Things that we've we've had to do and I'll cost structure.

Right and I think you may have touched on it where you just touch on at the end of you're opening but how does this change business going forward in in maybe present, some greater opportunities that maybe you didn't see before in in How're you changing.

The environment.

Changing to to kind of take advantage of the environment or whether it's market share games or rather office.

The same thing.

Yeah, you know so.

There's something that we spend a lot of time on it S.W. and we've been talking about it with a leadership team. We we believe strongly about leaders needs to be able to do two things there needs to be able to act on the short term in continuing to locate the long term.

Talk a little bit it's always about the balance between the two of those that you're doing those simultaneously. So you can imagine early on in this activity.

Just about 80% to 90% of the focus was on making sure that are people were safe and there were able to continue to supply outcome, our customers even with that we continue to explore r. and d. products innovation m. in a et cetera, because we think we are in the right position to be able to continue to take advantage.

You know market trends et cetera. So we haven't stopped all that we're actually now we see in a more stable environment. So maybe that balance is actually increasing more around the growth aspects of the business.

But we think we think they're going to be opportunities for us to continue to grow we'd like well off positions and this is actually a nice pressure test of our portfolio. Because you know we've been buildings portfolio over the last several years and people have questions about it cyclicality, how it would do in a downturn.

And it's it's been it's been a while performing portfolio overall.

Sure the number certainly appear that way well. Thank you very much for the time and a good looking cute too and they say.

Yeah. Thanks, Chris Thank you Chris.

And again to ask a question.

On your text hometown.

And that.

Further questions.

Over to management.

Okay, well. Thank you everybody for joining us on this call I want to close with just a hearty. Thank you to my global team you have done a tremendous job I know the stress is high for all of US both personally and professionally.

And I'm incredibly impressed by how you all responded we're going to do our best to continue to support you and to our customers hopefully you've you've you've seen the efforts that our teams have made and we will continue to work hard to continue to supply you as well. So thank you everyone.

Mm.

<unk> today's.

First quarter 2020, Ironies conference call. Thank you for participating you may now disconnect.

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