Q3 2020 Schweitzer-Mauduit International Inc Earnings Call

[music].

[noise] welcome to S. W. M third quarter Twentytwenty earnings conference call hosting the call today from S. W. Yeah, It's Dr., Jeff Cramer Chief Executive Officer. He is joined by Andrew Wamser Chief.

Financial Officer, Mark checking now director of Investor Relations.

Today's call is being recorded and will be available for replay later this afternoon.

At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation.

If you would like to ask a question at that time. Please press star one or your Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key.

If you should require operator assistance, please press star zero.

<unk> Dot Com I will now turn the call over to Jeff. Thank you Mark and good morning, everyone.

Before we discuss our results I'd like to again express the heartfelt appreciation of the SWS executives and the board of directors for the incredible efforts our global teams continued to put forth.

They are the ones responsible for delivering the strong operating and financial performance, we reported yesterday.

As we all adjust to our new normal I cannot overstate how impressed we are at the resilience and adaptability of our people.

In the year. Unlike any other we are fortunate to have a culture of excellence at all levels of the enterprise within incredible commitment to each other safety and outstanding service to our customers, enabling all our sites to operate uninterrupted during the quarter.

Following the second quarter, which COVID-19 meaningfully impacted both end market demand and operations third quarter results exceeded our expectations as we saw improving fundamentals in key markets.

Adjusted EPS increased 15% in the quarter with higher profits in both segments.

As store, both sales gains and margin expansion, while SMS saw sequential trend improvements.

Third quarter results bring year to date, adjusted EPS growth to 6% demonstrating that SWS diversified portfolio performance materials is strategically positioned to deliver growth in even the most unusual of economic environments.

Cash flow was strong our balance sheet continues to improve and while we are tackling the everyday challenges of the pandemic. We also remain focused on positioning SWS for further growth.

For Fms sales increased 10%, including the benefit from the Tegra acquisition.

On an organic basis, while sales declined 8% year on year. This performance demonstrated a meaningful sequential improvement from the previous quarter with our transportation film segment improving.

Further if we exclude the impact of the single end market HMS as a whole would have shown only a 3% organic decline in sales a remarkable achievement given the overall global economy.

Our paint protection films continues to be the most effective product line in the portfolio due to COVID-19, but with greatly improving trends.

We are encouraged by the sales performance towards the end of the third quarter and are optimistic that fourth quarter results will put us on a solid trajectory exiting 2020, assuming the pandemic does not cause further channel disruption.

We continued to be very positive on the longer term trends and our leadership position in this marketplace.

Consistent with the first half medical was again, our fastest growing end market during the quarter.

As Weve noted many of our materials are either direct beneficiaries of COVID-19 prevention, such as Meltblown media for end 95 face masks.

Or are seeing indirect demand due to higher traffics in hospitals, driving usage abetting packaging and traditional disposable face masks.

Industrial sales increased again, due primarily to packaging products as well as higher demand for wind turbine blades that support the expanding green energy market.

Another area of sequential sales trend improvement was filtration, which had declined in the second quarter versus last year, but was essentially flat in the third quarter.

Air filtration products led the category again as HB AC units are seeing filter upgrades to higher quality materials to improve air quality and limit Corona virus spread.

We are benefiting from this upgrade cycle and are executing several projects to continue to increase output of our higher end HB AC filtration materials per our September 29 press release.

Process filtration trends also showed improvement.

And while water filtration remains a little choppy customer indications are for a stronger finish to the year.

Infrastructure and construction was lower versus last year, but the decline was wholly attributable to a business sub unit focused on the energy sector, where low oil and gas prices have been impacted demand for supporting products and services.

Weaker performance here has been offset by this units increasing exposure to solar energy farm construction, which is a growing segment.

This new channel could represent another opportunity to leverage demand for Green energy solutions.

The remainder of our infrastructure and construction business showed modest growth in areas such as turf and construction.

During this transition.

With that I'll turn the call over to Andy.

Thank you Jeff beginning.

Beginning with our segments Ams sales increased 10%, but we're down 8%, excluding the <unk> acquisition.

Tech rock contributed $23 million of sales in the quarter.

The organic sales decline was largely driven by the decrease an aftermarket transportation films, while the remainder of the portfolio declined only 3%.

The sales trend marked a sequential improvement from the second quarter.

Ams generated 25 million and adjusted operating profit in the quarter up 2%.

In addition to the contribution from Tech rock.

Profitability in this segment also benefited from expense control initiatives and favorable raw material costs.

Adjusted operating margin was down only 130 basis points to 18%.

And we note that this was a significant sequential improvement from the 15, 7% margin that we reported in the second quarter.

For the full year as we have previously stated.

On a consolidated basis sales in the quarter increased 9% and adjusted operating profit and EBITDA increased 26, and 25% respectively.

Third quarter 2020, GAAP EPS decreased to 78 cents from 90 cents.

The decrease was largely due to onetime expenses of 18 cents related to the planned shutdown of the spots with site.

Given general Investor interest and our liquidity position as the impact of the pandemic rippled through the economy.

However, given the healthy position of the balance sheet and cash flow, we intend to pare back this detailed going forward.

To summarize we have over $475 million of available liquidity between cash on hand, and our revolving credit facility and have continued to the level of the balance sheet. We currently stand at a healthy two five times net debt to adjusted EBITDA.

Our capex through nine months of the year totaled approximately $24 million as we continue to conservatively deploy capital.

Now back to Jeff.

Sandy.

So to wrap up our comments I'd like to step back from the quarter's results and talk a little bit more broadly about the portfolio.

Obviously, we are pleased with the recent performance of our business throughout the year. Despite the numerous challenges.

More importantly, though we believe our resilience is the result of a multiyear effort to strategically build a diversified portfolio position to deliver strong results through out an economic cycle.

Our paper business wall mature has continued to offer a highly stable adjusted operating profits exceeding 120 million and each of the past three years and is on track for fourth in 2020, while also providing robust cash flow.

To drive long term growth, we have built Ams into a 500 million plus scaled and integrated unit with a broad array of products and strong presences and diversified and markets.

Some offer non cichlid title non cyclicality, such as medical while others are positioned for accelerated long term growth like filtration and transportation.

Such a diverse portfolio of course the company has served served US well recently and we believe we are positioned to emerge from COVID-19, a stronger company.

Our performance has required a great deal of collaboration and ingenuity to pivot is necessary and overcome the challenges of the pandemic.

Throughout the year, though we have not lost sight of the longer term strategic initiatives to support future growth.

These include innovative product development activities, and both Ams and EP commercial.

Commercial synergy realizations from Tech work.

Close relationships with our customers and so our supply chains are pretty well integrated.

Okay. That's helpful. Thanks, Jeff and then.

Turning to HMS could you just update us on.

We are temporary tracking relative to the sales and EBITDA margins that you kind of discussed when the deal was announced and just remind us how you think about the big market synergy opportunities and the overlap with the existing portfolio.

Yes.

Give you a high level. So you know from a from a topline perspective Tegra is on track you know probably the mix in terms of how we're getting there is a little bit different than what we expected.

No as you recall Tegra does have some medical exposure, which we've seen some really good growth there but.

Uhm expectation is that the fourth quarter.

If it could have a pretty good outlook for that for that business returning back to normal and returning to growth.

On a year over year basis.

Right right Okay.

And.

Maybe it will be the less of a tailwind as as we look ahead, but it doesn't look like it's gonna be much of a headwind neither how should we be thinking about other potential inflationary pressures and any discretionary type expenses that.

You would expect to start to flow back into the business over over the next couple of quarters.

Yeah, you're right on that front it'd be kind of look at it too too raw materials that we have the most volatility with pulp it'd be one, which we did see a modest benefit.

And the third quarter, you know just a little over about $1 million a half.

Year.

Look at working capital kind of goes back to.

We also want to make sure that we are on.

Supplying our customers and have safety stock for our customers. So we may see some inventory levels, a little bit higher revenue traditionally seen at year end to make sure and give assurance as to our customers that we can.

Our prepared for any sort of if there is any sort of possible shutdown anything like what you saw.

In spring.

But our expectation is that we'll continue to de lever as we close out the year, we pay down I think $62 million. So in debt since the tech requisition I expect that to continue to it could be up to 80 80 or so.

As we close out the year and.

Your one point.

You know about the portfolio its.

We expect sequential improvement I don't know if you <unk> can you maybe just give us a little color demand trend going into Q4, and you know just given that 2020th 2020, you know maybe an abnormal year for maybe trends and thinking about queue for thanks.

Sure.

And I guess, just thinking about the portfolio and how well we perform through the through this year.

As the pandemic made you think about investing in certain maybe maybe product lines or new product innovation can you just maybe talk about how that's changed your outlook over maybe for the next 12 months of the way you think about the portfolio and where you are going to invest.

Well I mean directly you sit you saw from our announcement, so filtration and medical you know those are two areas that we're really trying to de bottleneck. So if you want to think about investments there we might be doing things around de bottlenecking et cetera, but.

But I don't think it's materially changed our long term portfolio, we like filtration, we like medical we.

We like our surface transportation, so I actually think its confirms our strategic focus more than anything else. So I think we're comfortable with the portfolio and the horses that we have we'll look to invest in all of them, yes, maybe just to add that there.

There are areas in EPA to that that are that are promising as well in terms of some of the some of the growth that we've had and heat not burn in some other areas. So that also is another area that were that were looking for to help sort of.

Fuel provides stability within that segment, yes, any change Curt Chris I think it's important I answered it from a covert perspective, but I think Andy's builders correct. Because we do think we have opportunities to do things in the business as well. So I think that was an important add.

If I wanted to ask about the EPA to talk about with heat not burn some new product, maybe some new product introductions can you just maybe dig into that a little bit.

Now this is Jeff again, just I want to thank Mike Global team.

Tremendous job.

You guys are doing a terrific activity and we're really proud of you stay safe.

And we'll talk with the investment community.

At the end of the fourth quarter again, so thank everyone.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may now disconnect.