Q4 2020 Neenah Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Neenah Q4, 2020 earnings conference call at.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
I ask a question during the session you will need to press star one on your telephone please be advised for today's conference is being recorded.
For any further assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today, Bill Mccarthy Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thank you and welcome to Neenah is fourth quarter 2020 earnings call for.
Press release, covering our financial results was issued yesterday afternoon. So hopefully many of you have had a chance to review that information.
On the call today, you'll be hearing from jewelry Shoretel, our chief Executive Officer, and Paul for Santos, Our Chief Financial Officer Julie.
Julian Paul will discuss recent activities and financial results and comment on our outlook as we look ahead into 2021.
We will finish up with a recap of key strategies and initiatives underway to drive long term value for.
Following these prepared remarks, we'll open up the call for questions.
Adjusted earnings of 87 per share in the fourth quarter equaled that of prior year and 2020 GAAP earnings were adjusted to exclude $6 million of expense for 28 per share and included a noncash impairment of a small overseas investment two.
2019 fourth quarter adjusted results excluded a net gain of $1 2 million or <unk> <unk> per share mostly related to a post retirement plan settlement.
Additional details on adjusting items, along with a reconciliation to GAAP figures can be found in our press release.
Finally, I'll note that our comments today include forward looking statements actual results could differ from these statements due to the risks outlined on our website and in our SEC filings with that I will turn things over to Julie.
Thanks, Bill and good morning, everyone. The fourth quarter marked the end to an unprecedented and challenging year for everyone. While there was no escaping the impact of the pandemic I am pleased with the actions we took to prioritize the health and safety of our employees maintained substantial liquidity at.
The rest of Lee reduce cost and drive demand recovery. This was evidenced in our strong performance as we exited the year with both segments again, delivering sequential improvement in quarterly revenues operating income and margin.
In the fourth quarter, adjusted operating income of $21 million and corresponding earnings per share of 87 cents. Both equaled. The prior year performance was led by our technical product segment with the combination of a strong market demand new product launches and efficient manufacturing technical products sales.
<unk> increased an impressive 11% versus 2019 and adjusted operating income of $18 million reached the highest quarterly level in recent history.
Market demand in fine paper and packaging as expected had some more extended recovery curve and we remain on track for this business to recover 90 per cent of its pre COVID-19 orderly run rate of $90 million this year.
Before we talk about 2021 later in the call I'd be remiss if I didn't note some of the key accomplishments our teams achieved in 2020.
Most importantly, with new health and safety protocols to put in place we were able to protect our employees and avoid disruptions to our operations and to our customers.
We began to implement a neenah operating system at our two largest facilities utilizing lean principles. This system will improve safety quality customer delivery and will reduce our cost structure with improved productivity and unlock capacity.
We aggressively reduced cost and working capital, resulting in free cash flow of $75 million, one of our highest years ever.
We quickly developed and commercialized high performance media for face masks to support Covid relief efforts and meet our customers' needs. We published a corporate sustainability report highlighting the meaningful progress made over the past five years and reducing our carbon footprint building, a more diverse and inclusive workplace.
Price and maintaining sound governance practices.
We successfully refinanced our senior notes that were due this year and replace them with a more flexible term loan b due in 2027.
We reinvigorated our innovation efforts and lost a number of new products that will generate incremental revenue for years to come we maintained a disciplined and active M&A pipeline, we strengthened our executive leadership team combining new leaders that bring fresh perspectives with existing personnel who have deep.
The experience and Knowhow and lastly, we updated our vision and strategy, providing a clear direction of focus for our organization on key drivers that will add significant value and support expansion into our for targeted growth platforms.
With increased capabilities of our teams and strategies and catalysts now in place, we're clearly entering 2021 with momentum and positioning ourselves well for future profitable growth I'll talk more about this later in the call, but we'll now turn things over to Paul to discuss fourth quarter financial results in more detail.
Okay.
Thank you Julie.
As you heard both business segments delivered another sequential quarter of improved sales profit and margins versus the third quarter sales increased 8% adjusted operating income was up by more than 30% and adjusted earnings per share jumped almost 60%. These results were led by our technical.
Products segment, which now makes up almost 65% of our total revenue. So let me start there <unk>.
<unk> of $137 million for the quarter were up from quarter, three and more impressively grew 11% versus last year.
The increase was driven primarily by volume growth and helped by currency translation as the stronger Euro increase the topline by about $5 billion. These favorable results were partially offset by lower pricing in a few categories such as backing that have price adjusters tied to raw material input costs.
Yes.
Our filtration business has continued to perform extremely well and fourth quarter revenues were up almost 30% to a record $66 million transportation filtration media sales grew strongly in Europe, and the U S and sales of industrial filters increased by more than 20.
<unk> industrial filtration growth was led by gains in products used for evaporative cooling and other similar applications quarterly revenues also included about $4 million for face mask media, which we began selling in 2020.
Outside of filtration, our industrial solutions business also performed well with almost 20% growth in backing primarily due to increased tape revenue with new products introduced at some of our most strategic customers earlier in the year.
Segment, adjusted operating income of $18 million was up from $10 million in the fourth quarter of 2019 and operating margin also increased from 8% to 13% of sales.
Higher income in 2020 resulted from increased sales and production volumes lower input costs net of selling prices reduced SG&A spending and favorable currency translation.
Turning to fine paper and packaging net sales of $70 billion increase from the prior quarter and as expected due to Covid, we're below sales in the fourth quarter of 2019.
Volume was the largest reason for the shortfall with commercial print accounting for most of this due to reduced demand for print marketing and advertising.
Consumer revenues fell impacted by timing of back to school sales, while premium packaging revenues increased led by growth in labels and folding board.
Segment adjusted operating profit was just under $8 million up 15% from the third quarter, but below prior year due to lower sales and production volumes and a less favorable mix.
These impacts were partially offset by reduced SG&A spending and modest benefits from lower input costs net of selling prices. As a reminder, we have a history of successfully managing costs and our asset footprint to generate attractive returns and good steady cash flows that we can invest in.
Growth categories.
The commercial print market, while in secular decline makes up less than half of the segment sales and our consumer and premium packaging businesses with their stronger growth characteristics.
Actually utilize the same asset base with actions and plans underway I am confident we're on the path to recover volume and restore historical mid teen operating margins.
Next I'll cover a few corporate items consolidated SG&A was $21 5 million down almost $2 million from last year.
In 2020, we carefully manage spending and expenses like travel where severely curtailed in 2021 with the resumption of more normalized spending we expect quarterly SG&A of approximately $25 million with unallocated corporate costs of five 5 million.
Interest expense was $3 1 million in the quarter up from $2 8 million in 2019, the increase was largely due to higher non cash amortization expense related to refinancing our bonds plus interest rate differentials on cash and debt as we built up a large.
Net cash balance in 2020.
Our income tax rate in the fourth quarter was 15% compared to 19% in the prior year. The 2020 rate included a benefit from a provision of the cares act, which allowed us to increase the value of certain net operating losses and will generate a cash benefit in 2021.
On an ongoing annual basis, we expect our tax rate to be approximately 22%.
With $37 million of cash on hand, and no borrowings against our revolver year end liquidity was over $175 million and remains in excellent shape.
Cash generated from operations in the fourth quarter was $13 million and while down from the fourth quarter of 2019. It decrease for the right reasons in 2019 cash flows benefited from a drop in receivables as yearend sales tapered off due to typical seasonality.
This was not the case in the fourth quarter of 2020 as customer demand was still rebounding from the impacts of Covid earlier in the year.
In addition, as noted in our last call, we accelerated $6 million of retirement plan cash contributions into 2020.
In 2021, we expect to return to a more traditional level of cash flow with increased working capital as we grow sales, while maintaining our efficiencies for.
Fourth quarter capital spending was $7 million.
This included a project to increase coding capabilities at one of our plants to support growth and release liners for the full year capital spending was only $19 million as we cut or deferred non critical items in 'twenty 'twenty, one we expect to resume more normal.
Spending to around $35 million.
I'll end with a few additional comments on our near term outlook.
<unk> for both business segments should continue to recover with general economic activity.
While we won't be back to Q1 2020 pre COVID-19 levels by the first quarter due to the slower recovery in fine paper and less of a seasonal bounce back in technical products. We expect to continue delivering modest sequential quarterly gains the second half of the year.
Should reflect more normal seasonal patterns and we will include costs for our annual maintenance downs in the third and fourth quarters with the weaker U S. Dollar recovery in global economies and short term volatility in supply and demand factors input prices for fibers chemicals.
And transportation costs have all begun to rise off of Q4 lows since many of our fiber contracts have a one quarter lag to market. We would expect to see the majority of the impact from fiber increases starting in the second quarter.
Our teams are aggressively working to mitigate these higher input costs with pricing and other actions, we're confident that overtime, our pricing will successfully offset cost headwinds, though sometimes this may not happen in the same calendar year.
Input costs in 2021 could be more than $20 million higher than in 2020. However for the full year. We currently expect volume growth and benefits from our cost and pricing actions to offset this.
One positive outcome of the weaker U S. Dollar is translation of our European operating results with the the Euro currently over $1 20.
It's more than five above the 2020 average.
Each nickel is worth about $10 million to annually of sales and a little less than $2 million of operating income for <unk> per share.
Finally, I would note that in 2021, our publishing business will be managed as part of fine paper and packaging. The change enables us to realize SG&A efficiencies since fine paper and packaging as a similar path to market and customer overlap publishing is a relatively.
Small category with sales of less than $30 million and mid single digit operating margins. So if you are building 2021 models. This business should be request from technical product into fine paper and packaging.
Wrap up as I started by saying our businesses delivered another quarter of improving revenues profit and margins led by technical products and outstanding filtration performance, while the economic environment still has its challenges demand is recovering in both segments and neenah remains on a strong.
On financial footing and as always we remain committed to the financial principles, we've been known for maintaining a prudent balance sheet.
Disciplined capital deployment, and returning cash to shareholders through an attractive dividend on that.
That note I'll turn it back to Julie.
Thanks, Paul.
Our recent results are demonstrating the success of our strategy and ultimately will make neenah faster growing more profitable company.
Each of our businesses is on track or ahead of the top line recovery expectations, we've communicated technical products exceeded pre COVID-19 levels in the most recent quarter and fine paper and packaging is tracking with its targeted pace of recovery.
Going forward, we will drive profitable organic growth as we build on three core competencies.
Manufacturing excellence customer intimacy and our robust innovation process. The neenah operating system will deliver meaningful value and help us further excel operationally to support employees and customers with improved safety quality delivery and cost and unlock.
<unk> latent capacity.
Customer intimacy has always been an ingredient of our success and technical products. Our R&D teams work closely with customers to meet their demanding performance and qualification requirements and fine paper and packaging our design team collaborates with customers to develop freemium products and sustainable.
Solutions that support their brand equity and image our work with customers often includes joint development efforts that draw on our innovation abilities and technical expertise.
I mentioned earlier, how we continue to strengthen our teams and capabilities. This includes the recent hire of an experienced global head of our innovation process reporting directly to me.
With this change we've realigned our R&D teams to leverage their knowledge and skills across neenah.
This will allow us to unlock even greater value with existing and new customers and expand into new markets.
While excited about the future I'm also pleased with what our teams have done over the past year and technical products. In addition to successfully commercializing high performance face mask media, we've lost a high efficiency filter media for heavy duty trucks created new filtration offerings for GAAP.
Going need like evaporative cooling provided a unique dissolving label and extended our digital transfer technology to new end use applications.
And fine paper and packaging, we've launched new planner journals and teacher tools for the retail channel and initiated a number of new products that provide a sustainable and desirable alternative to plastic.
As I've mentioned, our focus is on expanding on our four growth platforms filtration specialty coatings cash.
Engineered materials and premium packaging.
Each of these platforms are growing profitable and defensible and align with our manufacturing technologies, our path to market and material science Knowhow and.
In addition, they benefit from macro trends like a desire for cleaner air personal health and environmentally friendly solutions.
These platform significantly increase our addressable market and will allow us to unlock synergies as we gain scale.
We plan to grow in these platforms organically and through M&A. Our M&A pipeline has remained active and focused on a robust set of targets that are a strategic fit and meet our required return as a result of our strong balance sheet. We're in great shape to act on attractive opportunities that arise.
Let me talk next about our initiatives underway to increase margin our businesses have returned to double digit margins in both segments and technical products ended the year with some of their best margin in recent history for.
Further improvement will occur as we grow on our targeted markets supported by innovation efforts that result in higher value and margin accretive new products and offerings.
Neenah operating system will also be an important contributor with incremental value creation of over $20 million annually when fully implemented in our two pilot facilities employees have embraced this new process identifying projects and enthusiastically tackling opportunities I could not be more incur.
<unk> by the level of engagement pride and results we're achieving.
Neenah has always had a strong culture of continuous cost improvement and I believe that the momentum we're seeing is contagious and our initiatives and success will accelerate as we implement the system and other facilities.
Through the combination of these efforts, we will increase our organic growth rate with both business segments delivering mid teen operating margins. However, this wouldn't be possible without the right people doing the right things the right way I'm fond of saying culture eats strategy for breakfast and we're fortunate at neenah to have.
Culture that always make safety the top priority is results oriented with a strong bias for speed and it's collaborative and inclusive we've emerged from a challenging year with a strong financial position clear roadmap to accelerate topline growth and specific catalysts to increase margin yes.
Seeing the results of our strategies and actions and I am excited about our future.
Now I'd like to open the call for questions.
As a reminder to ask a question for you will meet the press star one on your telephone to withdraw your question press the pound or hash key please standby, we compile the Q&A roster.
Your first question comes from the line of John Tang One Cheng from C. J. Your line is open.
Hey, good morning, Thank you for taking my questions on very nice quarter.
My first one day.
Morning, just for.
First one I wanted to ask.
I think one of you maybe Paul you mentioned that you're expecting to see sequential quarterly gains.
Throughout 2021 does that include Q1 over Q4 or is that are you going to see the seasonal downtick because as we head into the first quarter on maybe just talk about trends youre seeing today.
Okay.
Yeah, what I would say John as you know.
I wouldn't take Q4 and annualize that for sure on one of our best quarters ever in technical products. So I would be cautious on that would be a little bit overly ambitious I'm really pleased with the margin improvement we had in Q4, particularly in tech products at 13% and <unk> pay for it not far behind it with a lot of momentum as we enter 2010.
What we also know as input costs rise and we will feel some pressure from that as well as just normal seasonality and machine downtime. So over time, we're going to continue to see improving margins and improving profitability. It just may not always be linear.
Cause of some of those moving pieces, but I expect both segments to achieve mid teen margins over time.
Q4 was a nice solid step in that direction.
Got it. Thank you for that color and then just on the on the margin as you look at the year was $20 million and increased input costs. I know you guys have a great history of passing them through.
But is it possible to increase margin year over year, given that amount of headwind.
As you are looking at now or how should we think about the ability to grow your operating income and gross margins as we as we look through the next three or four quarters.
Sure.
We expect to recover raw material inflation, just like you said over time it does vary by business, depending on just normal market pricing norm. So on some parts of our business that happened more quickly than others, we have announced price increases in fine paper and packaging and in industrial and filtration, we negotiate contracts.
On commitments annually. So we typically get more of a lag we get that with inflation and with deflation.
We also have some nice fiber pricing lags and RF fiber contracts. So that we have a little bit more time to accelerate enough debt with pricing that helps us manage timing and probably most importantly outside of pricing. We're taking a number of other actions to offset input cost to accelerate our neenah operating system drive continuous.
Cost improvement prebuilt raw material inventory. So all of that said, we estimate will offset raw material inflation. This year, while at the same time continuing to make progress in our growth strategy and initiatives.
Okay great.
And just one more on I'll jump back in queue, but just given how strongly type products performed in the quarter.
Can we see some more of that strength going into Q1, especially as we look at the auto guys inventories are still low.
Or is there more of a hangover coming that you are seeing just give us a sense of maybe compared to three months ago, if that market is going to be stronger or or maybe it's the same as maybe you thought when you last reported.
I would say right now we're seeing it continue to see nice demand in growth both in Europe, and in North America, and as a reminder.
We have about 30% of our filtration business that is not transportation filtration, it's more on industrial filtration.
Within transportation filtration about 75% of our business goes to the aftermarket and about half of our business goes to heavy duty vehicles. So we're really more influenced by the economies than we are buying new car sales.
Our car inventories, it's really that aftermarket sales long as the economy stays strong we're expecting to see nice continued demand.
Great. Thanks for the reminder, and I'll jump back in.
Your next question comes from the line of Chris Mcginnis from Sidoti <unk> Company. Your line is open.
Good morning can you hear me yes.
Yes. Good morning, Thanks for thanks for taking my questions from nice quarter, sorry, I'm on a cell phone I apologize.
Yes.
I just wanted to ask I guess, just with the improvement.
Around technical products can you just give an update on where albertsons and maybe the expectations for the year.
From that facility. Thanks.
Sure.
Chris I'd be disappointed if you didn't ask about Apple debt.
Hi.
So.
Today, we had really strong performance in global filtration as you saw in Q4, and as a reminder, Appleton and North American filtration as a part of that we also have another filtration facility in North America that helps drive filtration as well, we just haven't probably talked about as overtly and we really manage this.
Business as a system just like our other businesses, so we optimize profits and utilization for our lowest cost assets first and the last year or so we've unlocked additional capacity in our filtration facility in Germany, with an environmental investment as well as with the Neenah operating system implementation. So we're still on.
On a journey is how I would think about it and filtration I'm pleased with our recovery from a global filtration standpoint on our innovation launches and our margin has got good momentum, but I would be remiss if I didn't say the qualification process out of Appleton has been lengthy and it has taken more time than we originally anticipated.
And we're still experiencing that for a fair degree so it's a journey.
Got it.
I apologize for harping on I was just wondering.
We've got really really strong for us.
Thanks.
It was a really good quarter so congrats on that.
I guess, just thinking about 'twenty, one on the top line, especially or I guess just in fine paper.
How much of the expected recovery of that 90% is.
Maybe the legacy business coming back versus new product introductions can you just help us understand that maybe a little bit better. Thanks.
Sure.
It's more heavily the legacy business coming back, but it's supplemented by new product introductions.
We expected and we're still expecting about a 10% permanent demand destruction in fine paper.
That means we'd get to about $88 million per quarter on average and we expect to return to that.
This year over the course of this year, but the majority of that is our historical business coming back in the other.
The nice part about fine paper that we didn't have always in the past is the diversity of the portfolio. So the fact that half of fine paper is commercial print, which has the greatest pressure on it. The other half is consumer products and its premium packaging was passed some nice growth dynamics and the team has done a great job of extending beyond traditional paper products.
With new products like teacher tools, and planners and journals and plastic alternatives like gift cards and <unk>.
<unk> for graphics, so I'm encouraged by where we are in fine paper and it's a strong business that generates a lot of nice cash for us.
Great and just in terms of.
You mentioned some sustainable products are you going to market a little bit differently, given theres, a seems to be a greater focus following the pandemic around sustainability.
Just maybe talk about how maybe that's changed if at all.
Given the pandemic.
Sure I think to.
For the go to market approach hasn't necessarily changed as far as our path to market I think what has changed is our acceleration on focused on innovation, we expect our business to grow at GDP, plus and innovation is a key part of that and we've achieved that in places like packaging and filtration and backing but that means that our innovation process has.
To be robust enough to offset some parts of our portfolio that are under secular decline pressures or that are towards the latter part of their lifecycle by introducing new margin accretive products early in their lifecycle. So we've really focused on <unk> our resources to do so as part of our strategy is to increase our organic growth rate as we view it.
<unk> as a catalyst for that.
I am pleased that I said in my prepared remarks, we've recently hired a new global innovation leader that will help us do that as well so I think where we're seeing it more from the acceleration of sustainability is around our innovation efforts on new product introductions.
Great and just on the new higher.
I guess can you just maybe.
The biggest areas of focus the new force coming on.
I apologize I'm trying to jump between two calls so if I missed any detail earlier now for mix.
Yeah, our new our new job for me gentlemen, it has about 15 years of global on industry experience at three am on Honeywell, leading innovation teams on new business development teams as well as Rand pack sales. He comes in transitions and for Neenah. He just started a little over a week ago. His primary focus is going to be on how we accelerate a global.
Based on process and really utilize the skills and knowhow and knowledge of our technology teams across neenah. So historically, we've been more aligned by category, which can work well, but it can also sub optimized across the net so we might have great.
Technology knowledge around coatings in a particular category, but we need that in another category like we might have been in tech products, but we needed a fine paper as we drive new innovative products and he is really going to help us ensure we're making the right decisions and accelerated growth across all of neenah.
Great I appreciate that thanks for taking my questions and good luck for Q1.
Thanks, Chris.
Your next question comes from the line of John Ken Wang Cheng from C. J S. Your line is open.
Hi, Yes, I just wanted to revisit the yes.
G&A commentary for the year I think you said $25 million on average per quarter, but I assume just like everyone else.
We're still under some sort of COVID-19 restrictions on budget.
Budget control does that ramp through the year on just comes out to an average of 25, how should we think about it on a on a quarterly cadence perspective, yes.
Yes, no John that's good I think not all the costs are going to resume immediately so things like travel and alike, but some of the other costs are going to be a little bit more front end loaded. So there may not be tons of volatility between quarter, but yes, but certainly on a on a ramp up I think would make sense, but I wanted to.
I do want to be clear within this SG&A guidance that we're giving we are investing behind some of our highest growth potential initiatives. Julie just talked about innovation. We've got some automation going and those are really to support a lot of our margin driving and top line driving initiatives like the neenah operating.
System, so within that bounce back of SG&A, you're going to see some focus on really driving value in the organization.
Got it thank you and then.
There was a due diligence line in the quarter just wondering if that's foreshadowing any movement.
M&A.
<unk>.
Tell us about what's out there in terms of the pipeline and valuations in attractive end markets.
Sure I'll take that one John we have a very active M&A process and we maintained an active pipeline and process throughout 2020, So we're always evaluating opportunities sometimes those work out and sometimes they don't.
An important part of our strategy, we're focused on the for growth platforms, I've mentioned, a little bit in the past so that is filtration.
Custom engineered materials like composites would be an example, it's specialty coating something like silicone release, where we have an organic investment in our capital plan would be an area of focus that opportunity and then premium packaging.
Those would be the areas, we're focusing on where we can accelerate our growth trajectory with a strong strategic fit it's accretive and we get compelling returns.
Great. Thanks, Julie just one more thing if I could ask.
Do you have a number for how much the premium packaging business grew.
Sequentially or year over year.
Yes, I think that the premium packaging business was in the mid single digits in the quarter and the fourth quarter. When we when we look at growth.
Got it thank you.
Sure.
There are no further questions at this time I will turn the call back over to Bill Mccarthy for closing remarks, great well I'd like to thank everyone for your time on interest today and as always please feel free to reach out to me. If you have any further questions. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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