Q2 2020 Schweitzer-Mauduit International Inc Earnings Call
Hosting the call today from vegetables U M is dr. jeffs framework.
Except Goodies officer.
He is joined by Andrew Windsor, Chief Financial Officer, and Mark checking out director of Investor Relations.
Today's call is being recorded and will be available for replay can learn later this afternoon.
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It's now my pleasure to turn the floor where to your speaker today Mr. Mark Chicken now.
Thank you Kirby good morning, I'm more check now director of Investor Relations that SWS. Thank you for joining us. It just got that's the view on second quarter 2020 earnings results before we begin I'd like to remind you that the comments included in todays conference call include forward looking statements.
Actual results may differ materially from the results suggested by these comments were another reason.
Discuss in more detail and our Securities and Exchange Commission filings, including our annual report on form 10-K quarterly reports on form 10-Q in particular, the extent to which the cobot 19 pandemic continues to impact our business is uncertain and depends on numerous evolving factors, which are difficult to predict including the duration and scope of the pandemic.
Actions taken in response to it.
So in the financial measures discussed during this call our non-GAAP financial measures reconciliations of these measures for the closest GAAP measures are included in the appendix of this presentation and the earnings release, unless stated otherwise financial and operational metric comparisons are to the prior year period and relate to continuing operations. This presentation in the earnings release are available on the.
After relations section of our website www dot that's W.M.I.N.P.L. dot com I'll now turn the call over to Jeff.
Thanks, Mark good morning, everyone.
Now the new normal in today's Kobin challenge environment.
It's important to open our earnings call with a hearty. Thank you to all the global employees are best there'll be a win.
Their commitment to their co workers health and dedication to delivering products the central to our customers' ability to man you factor is exemplary.
They are uninspiring team.
Directly responsible for this quarter is positive results.
As we expected this quarter was challenging from a global economic perspective.
As it was the first quarter to fully experience the impacts of the global epidemic.
With that said that's got to be on performed well given the circumstances with very good margin performance from BP and an A.M. best portfolio about demonstrating its resilience across many markets.
We have shared previously that the SWS portfolio was robust.
And well not entirely on affected by circumstances, such as these it remains capable of delivering strong cash flow and organic growth over the economic cycle.
We believe our reported results support this view.
[music].
Returning to the theme about our People's dedication and how their efforts made a difference I.
Our global supply chain, it's certainly been tested thus far in 2020.
But judging from our customers positive feedback we have the liberty.
Since Colbert began.
Our global teams have demonstrated the ability to implement the effective safety protocols across all sites.
These actions enabled us to minimize service disruptions and show why our customers, placing their trust in us during both good and challenging times.
The teams across our global manufacturing footprint demonstrated SW I'm supply chain reliability and flexibility.
No we weren't impacted by short term plant closures in France really epidemic, while we made adjustments to increase hygiene and social distancing requirements.
And the longer six weeks shut down during the quarter at our New York facility as a result of strict New York State stay at home restriction.
Our agile teams rerouted inventories shifted production across global sites and collaborated with logistics providers to keep our service levels high.
And while we did see an impact to our bottom line, we were able to meet our customers' needs for nearly all our products and keep our people say.
I'm pleased to highlight that all our facilities are up and running well.
Our first half 20, or 20, adjusted EPS of $1.75 essentially flat with last year a positive outcome.
Although second quarter earnings declined 15% to 90 cents.
The year over year pressure would generally confined to the temporary site closures in the EPA segment.
A near term pressure on our transportation films business.
Our focus on expense controls and favorable in corporate costs offered partial offsets cuckolded related pressures.
Importantly.
While the piano reflected some headwinds in the quarter.
Our free cash flow with strong, enabling us to pay down nearly $90 million of debt, while maintaining our attractive dividend.
So just to close my introductory remarks.
That's there'll be EMS performance was positive in a challenging world.
We remain on strong financial footing with a healthy balance sheet, good cash flow generation and we continue to focus on strategic initiatives to drive long term growth. After we finally exit this environment.
[noise] moving to M.S.
Hey, Matt sales increased 5%, including the benefit from the tech or acquisition.
On an organic basis sales declined 15% driven mainly by weak demand in transportation, which Matt good performance in other end markets.
Excluding transportation and mass segment organic sales declined only 4%.
Within the portfolio medical was again.
Market during the quarter with solid gains across multiple product lines.
Many of our materials are used directly in efforts to protect people against the corona virus or indirectly in hospitals, which are seeing increased traffic and occupancy.
I will melt blown materials for 95 phase masco seem very strong growth.
All other specialty products used to make traditional medical masks bedding down instrument packaging et cetera, all seen high demand.
Our traditional finger bandits product line is also performing well and we expect the overall medical businesses momentum to continue.
Industrial sales also increased with packaging films experienced high demand as online delivery of consumer goods has become more prevalent in this environment.
Also in this category, but unrelated to cold 19, our netting products used in the manufacturing of wind turbine boardings for Green energy solutions continued to perform well in 2020.
Filtration sales declined mid single digits as strong air filtration sales were offset by softness and water filtration.
Yeah filtration products saw excellent growth during the quarter doing two due to some share gains as well as more frequent changing of air filters in both residential and commercial applications to protect air quality.
Water was slightly weaker than expected primarily due to order timing with one of our larger customers and process filtration contracted due to slower industrial and construction activity limiting the demand for construction materials used in heavy equipment.
[noise] recent indications from customers are for stronger second half for the year.
Infrastructure and construction finally slowed after very strong start to the year, particularly in the energy sub segment, where oil and gas producers have Russell with low prices reduced rig counts and constrained investment capabilities in recent months.
We are still hearing discussions around stimulus to help drive the economic recovery.
The funding was allocated to high what do you improvements and other infrastructure projects our leadership in erosion control nettings in blankets would position us well to be a prime beneficiary.
Transportation remained the most impacted end market by the fall out of cold in 19.
[noise], increasing stay at home orders put in place around the Globe limited consumers' ability to purchase paint protection films from body shops in car dealerships.
While we are hearing indications of an uptick in orders later this year, our near term expectation remains cautious.
We have not lost our enthusiasm for this market longer term and remain bullish on our opportunities to expand within the category.
Our position in glass lamination materials also remains positive as new product innovations in transportation areas, such as high speed rail Windows and switchable glass applications in aerospace are partially offsetting general economic softness.
Our tech where integration continues to proceed well.
Chequers saw continued strength in most medical products offset by challenges in transportation.
We remain confident in our initial business case for this acquisition and are seeing many complimentary commercial opportunities from the combination that we can execute against in the coming years.
Switching to engineered papers, we had a non not the strong quarter of profitability.
Oh sales were lower by 15%.
Excellent margin performance from strong IP paper sales and cost performance limited the profit impact two or 3% contraction.
[noise] apart from normal attrition volumes were impacted that impacted by some inventory de stocking and the temporary site closure in ankrum.
While we were able to ship certain inventories and production runs across our system for most products some sales and associated products in our wrapper and binder business service from Ankrum will lost or delayed after our inventories on hand, where do we need it.
The site has been up and running at full capacity since reopening in mid may and should resume contributing nicely to our segment profitability for the full third quarter.
Our ERP segment and overall financial results would have been more positive of New York State business restrictions did not forced us to hold these operations as wrapper and binder materials that are used in small cigar production have been in high demand.
We also saw the impacts us some inventory destocking.
As we mentioned last quarter, we expect to see some choppiness in inventories as customers react in deferring ways to the pandemic.
We anticipate our volume and sales performance to be more normalized in the second half of the year with second quarter being more of an outlier period.
Heat not burn products perform well again this quarter and for the year are up more than double 2019 levels.
We continue to partner with our customers on developing new products to support the launches around the world in the small but growing application.
Overall, the industry remains generally unaffected by cobot 19 from our perspective.
Its overall studying this provides a large component of stable profits in high cash flows during this highly uncertain time.
With that I'll turn the call over to Andy.
Thank you Jeff.
Beginning with our segments Amex sales increased 5% or were down from 15% excluding the tech were acquisition.
Checker contributed 25 million of sales in the quarter.
Organic sales declined with skewed by the decrease in aftermarket transportation films, while the remainder of the portfolio declined only 4%.
Hey, mass was able to generate 20.8 million in adjusted operating profit in the quarter in a year over year decline of 4.7 million was attributed to the decline in higher margin transportation products.
The result, adjusted operating margin was down 440 basis points to 15.7%.
ERP segment sales decreased 15% or 13% ex currency for the reasons, Jeff detailed.
While price mix has been a consistently positive thing for each segment sales and margins in recent years the impact to the extended shutdown at our anchor from New York facility had a sizable negative impact on this metric.
However, now that this closure is behind US, we expect to see more positive price mix trends in the coming quarters.
All told despite the volume disruption in the quarter.
Adjusted operating profit declined only 1 million or 3% with adjusted operating margin actually increasing and impressive 340 basis points to 27%.
This margin expansion was from a combination of positive factors, including good performance of L. IP papers cost reduction activities, lower wood pulp car and favorable currency movements.
With all of our site up and running and input costs generally stable. We continue to expect solid margins going forward for ERP.
However, given the current environment, we caveat the any prolonged or additional production disruption at our key sites could result in more material impact.
Unallocated costs were up 1.7 million to 10.4 million.
The timing of administrative expenses and higher I T costs drove the increase but note that on a year to date basis unallocated costs were up 1.5 million. This increase is entirely attributable to the transaction fees associated with the Tegra acquisition.
We still expect unallocated costs to trend toward the mid $40 million level for the full year, including the tech REIT transaction fees with a favorable comparison likely coming in the fourth quarter due to timing of higher expenses incurred last year.
On a consolidated basis sales decreased 6% and adjusted operating profit and EBITDA decreased 15, and 12% respectively.
Second quarter 2020, GAAP EPS increased to 68 cents from 66 cents.
The increase was due to prior year adjusted EPS, reflecting 24 cents per share of onetime noncash expenses associated with tax assessments and our Brazilian operations.
Adjusted EPS decreased 15% to 90 cents.
The decline was driven by lower operating profits in both segments and higher interest expense on debt as a result of the tech run acquisition.
I would again highlight that despite a challenging environment, our adjusted EPS for the first six months of the year with essentially flat with prior year results, which we consider an impressive performance given the economic backdrop.
Our tax rate embedded and adjusted EPS calculation was 21.8% up 60 basis points versus prior year.
Regarding financial guidance, given the uncertainty around increasing covert cases, particularly in the US we've elected to not reinstate 2020 adjusted EPS guidance.
We have no plan changes to our capital allocation strategy and expect cash flow to remain strong potentially approaching 100 million for the year.
We again, one twoish all of our stakeholders that we are and solid financial position.
Details regarding our liquidity our in our press release, and our accompanying earnings release slides, but to summarize.
We have over 430 million of available liquidity between cash on hand, and our credit revolver.
To further demonstrate our confidence and the business, we reduced debt by nearly 90 million during the quarter with our cash flow and excess cash.
We currently stand at 2.8 times net debt to adjusted EBITDA.
Well within the covenant parameters with the increase from the year end 2019, due to the tech or acquisition, which closed during the first quarter.
Our Capex spent year to date of nearly 17 million analyzes below our initial guided range of 40 to 45 million.
We continue to spend prudently and in cases, where cobot 19 has impacted our end markets certain projects have been delayed.
We continue to accurately assess our investment opportunities and our and our diligently balancing near term conservatism along with continuing to invest in projects that provide long term strategic growth.
Now back to Jeff.
Thanks, Andy.
In closing I, just want to reiterate a few key highlights that some of our year so far.
First we are proud to deliver the results we did.
Our organization perform quite well.
In an environment, where everyone's primary focus is to health and wellbeing of our personal and business communities SW embrose to the most pressing business challenges many of us have ever experienced.
We met obstacles ranging from supply chain disruptions to end market demand volatility all the while implementing companywide safety measures and procedures and minimizing impacts to our customers.
All told I believe we passed the test with flying colors.
Second.
SW arms broad and diversified portfolio products technologies and end markets has served us well.
While not totally insulated from cobot 19 related pressures our first half 2020, adjusted EPS of $1.75 is even with last year's results and we continue to generate robust free cash flow.
There are several story lines at play and many puts and takes with respect to sales and profit metrics, but the bottom line is our business is stable and resilience.
Third when we last reported earnings and May be impacts of the Corona buyers were just beginning to impact the global economy, and there was tremendous uncertainty.
While we are seeing positive signs of normalization supply chain disruptions being resolved and indications of order books, turning the corner in several areas of our business. This uncertainty remains.
That said, we remain bullish on all markets longer term and confidence in our global teams abilities to mitigate short term disruptions.
We appreciate your continued support and interest.
That concludes our remarks Kirby please go up for questions.
Thank you as a reminder, you ask question you will need to furnish star one on your telephone and to me to our your question give me for us to County.
And we'll phosphoric among its compiled the peony roster.
Again, if you have any questions. Please press star one on your telephone.
Your first question comes from the line of Steve Chercover CE Davidson.
Your line is now.
Thanks.
Star one.
[laughter].
Can you quantify please the impact of Yang from New York City, I mean, I appreciate that you did call it out.
It was a special item in the quarter, ankrum, France or anything else associated cobot, but to help us model.
Maybe.
Just like you know, it's bigger than the bread box, yes, okay. So.
Rather than just talking about ankrum up I'll talk a little bit about the impact on the closing of both brands in Anchorage, It's it's probably the into several million dollars range overall.
When we look at it in total.
Okay, and then you suspended guidance, but it looks like pulp is rolling over is that consistent with your expectations beginning of the year.
Yes, I would say pulp is generally in line with what we paused, maybe a little bit lower probably in the first half right now that we see.
Stability, we always we re forecast for the.
The balance of the year. So it's it's in our internal I'd call forecast if you will.
Okay. Thanks, Andy and then closing the transaction like Tetra in the Middle 10, Dentek is unusual challenge I don't think you identified any material synergy. So they probably don't change, but have you had enough face to face with tech critic to gauge whether the cultural fit as good or assess any other surprises.
Positive, yes, well, yes, so a couple things sobi integration activities that we had plan are all on target and actually are going quicker in some cases than we thought.
In terms of cultural fit it's interesting I actually think this is a way of pressure testing that cultural fit and it's been very very good I mean, we've done some things around costs around adjusting some things and that went really smoothly.
And the cooperation between the business units is very high right now as we work too.
Identify and move forward on some of the growth synergies that we have planned.
Okay, and then on transportation I mean is your most lucrative business than the mass and it was called it for being weak.
Since China was we'll call. It FIFO first in first started Corona buyers.
And it's the core automotive film I mean are you seeing any green shoots in the business. We are seeing some green shoots and so we're cautious.
You can imagine were hit by the same trends that are hitting the global transportation market.
In China was is one of our fastest growing regions as was first hit if you recall, we've actually installed a surface protection line that we've actually brought on during last quarter.
And we have actually now gone through all the qualifications and are starting to see orders come in for that new line, which to US is a very positive positioning.
But I would still be remained cautious for the third quarter around our transportation segment.
But we are seeing some positives perhaps for the fourth quarter.
Okay Cool is that new line in China.
Yes, it's in our Sue Joe location.
So we now have manufacturing sites around the world. So we have it isn't Gilbert died in the UK or you know our meeting site in Greenfield in Massachusetts, and now suit Joe.
We're very excited about this marketplace long term.
Okay. My last question is on filtration well.
Industrial process and water I think are your core elements, but you do have air and so right quantify the opportunity there I mean should we all be upgrading the filters in our own.
Each back systems.
Well, yes, so from the air side, you're noticing you're hearing people going through that replacing filters and they're putting in higher grade filters or they're replacing them quicker and I think you're seeing that across the board. So that is driving the air filtration growth.
For most of for most of our business.
Okay I run the hardware store. Thanks for taking my question [laughter], just make sure you find something that has our product inside Steve.
Okay Yep. Thank you.
Thanks.
Again, if you have any questions. Please press star one on yourself.
Next question comes from Glenn, It's Chris Smith, Denise Sidoti and company, Chris Your line is now open.
Good morning, Thanks for taking my questions and nice quarter.
Wondering if it's.
Experiencing the pandemic noted coming out of it was there any markets that you feel like maybe.
You know that a surprise you a little bit in terms of the strengthen or or an opportunity to go out and grow in this period and maybe when you think about just the competitive landscape, maybe how that's changed and maybe and better position to kind of execute on growth. Thanks.
Yes. So a couple of things are strengthen medical you can imagine.
Is to be expected in something like this I was pleased though on the breadth of our strength in the medical across many of the sub segments within our categories there and that.
Was I think a very big positive the other places where we got a little bit surprised about the strength was in our industrial marketplace, where the shop at home markets. The use of our films and those types of applications was much stronger than we'd probably initially would've thought.
Hi, insight as you hear about all the shopping and everybody stay in home. It probably is more obvious but that would be one place that we were a little bit surprised.
Okay.
Just I guess just on the margin strengthen EPA.
I apologize I fell off the call for a bit. So if this is already asked.
Again, I apologize, but.
Just obviously very strong number.
And I guess it would have benefited more if anchor and France is on but.
To keep that's the remainder of the year and I guess, just the inventory destock in that business do you expect that the kind of come back.
In may be better trends in the back half the year. Thanks.
Yes, I would expect the third quarter the margin profile to be roughly comparable to what we just saw.
In the fourth quarter.
Maybe a little bit slightly lower.
Yes, that's is generally in line with the seasonal spread that we havent that business units, we have early shutdowns et cetera.
And I guess, just the order pattern.
The business itself for the back half of your stronger from what you saw in Q2 in or was that kind of an anomaly with the inventory destock and I think you reference.
Well some of the it's interesting I mean, we're talking a lot with our customers to figure out what the demand is and so I think in a normal world what you'd see in the fourth quarter is that you do see some of our customers.
Destock are.
Lowered their inventories for year end balances.
We did see some pull some pull forward of sales this year, but.
Those may actually stick as you know.
People are adjusting to not having a just in time inventory situation so to be Frank it's not as.
I would say crystal clear as we would all open to have just because of.
Everyone's adjusting the supply chain for this new world, but we would expect that traditional pattern, we have where.
The third quarter for as you would be relatively in line with what we just Didnt second quarter and then there's generally a drop off in the fourth quarter, which is kind of look historically.
But its way we operate yeah, I think Chris just one one add though.
The industry as a whole continues to have high demand.
So we're not seeing the falloff in demand the cost of any impacts of gold and in fact theres been a little less.
Probably contraction in the U.S. markets than had been previously so it's been a steady marketplace. Overall, so you might see some bouncing back and forth them quarters as people still wrestling with their inventories and what they want to have on hand to not.
But the overall marketplace remains very similar to what it normally us.
Great. Thanks for taking my questions and good luck in Q3.
Thank you Chris.
Again, if you have any questions. Please press star one on your telephone.
And there are no further questions at this time presenters you may continue.
All right. So I guess I'll just close this is Jeff I want to thank everyone again for joining us on this call I want to close again.
Actually to be Fwm community tremendous job team you did a terrific job I'm very proud of the things that you were able to accomplish and.
We're lucky to have you. Thank you.
Thank you so much to our presenters and to everyone. Participating. This concludes today's conference call. You may now disconnect have a great.