Q4 2020 Schweitzer-Mauduit International Inc Earnings Call
Second from S W and fourth quarter and for year 'twenty 'twenty earnings conference call hosting the call today from SWM is circa Jeff Kramer Chief Executive Officer.
He is joined by Andrew Wamser, Chief Financial Officer and Mark.
Checking out and director of Investor Relations today's call is being recorded and will be available for replay later this afternoon.
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And the most and quality and it's now my pleasure to turn the floor of its and Mr. Check and now Sir you may begin.
Hey, guys, good morning, and Mark check and Allen director of Investor Relations at SWM and thank you for joining us to discuss Swm's fourth quarter and full year 2020 of earnings result.
Before we begin I'd like to remind you that.
Wow.
And today's conference call include forward looking statements actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail and our securities and Exchange Commission filings, including our annual report on form 10-K, and our quarterly reports on form 10-Q, and particular, the extent to which the COVID-19.
The pandemic continues to impact our business and is uncertain and depends on numerous evolving factors, which are difficult to predict and believe me the duration and the scope of the pandemic and the actions taken in response to it.
Some financial measures discussed during this call are 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 the financial and operational metric comparisons are to the prior year period and relate to continuing operations.
This presentation and the earnings release are available on the Investor Relations section of our website www dot SWM and yellow Dot com I will now turn the call over to Jeff.
Thank you Mark and good morning, everyone.
As you may have already seen and our financial results pre release last week SWM delivered a strong 2020, despite many challenges and uncertainties demonstrating the strength and resilience of our global portfolio.
We are equally encouraged by the positive momentum we are carrying into 2021.
Before we get into details I'd like to again express the heartfelt appreciation of the SWM executives and the entire board of directors for the incredible efforts our global teams continue to put forth.
For.
And our results and achievements this year would not be possible without their remarkable commitment to each of the safety and outstanding service to our customers.
Fourth quarter results capped off a very good year for SWM with respect to our financial results and overall health.
Of the business.
We do not use the term resilient lightly when we describe our results and believe our diversified and balanced portfolio served us well this year.
Our EP business had an exceptional year with demand unaffected by the pandemic and its related economic uncertainties.
While Ams bounce back quickly for mid year softness and some areas delivering outstanding organic sales growth of 21% and the fourth quarter.
Bottom line for the year.
The Ams and EP grew adjusted operating profits, we grew adjusted EPS, 4% to 360.
68, and free cash flow increased to $128 million all while we continue to delever the balance sheet.
I would also note that while in the abundance of caution we withdrew our annual adjusted EPS guidance at the outset of the pandemic.
At the time, we communicated our conviction.
Conviction regarding the expected resilience of the business.
Ultimately as shown today, we delivered within that original range.
Further in late January we announced and offered to acquire SCAP a group of best in class innovation design and manufacturing solutions.
And for health care and industrial markets.
<unk> is expected to significantly increase our capabilities and propel us towards $1 5 billion of annual sales within and and spin enhanced growth profile.
We expect to close the transaction during our second quarter and look forward to provide.
Provider of the updates after the completion.
Yeah.
And for Ams overall sales increased double digits for the year with the addition of Tegra and despite of challenging backdrop organic sales declined a small 2%.
We believe this demonstrated the resilience of.
Of our diverse end markets and the specialty applications, which many of our key product support.
Breaking down our organic sales for all of 2020 by market medical sales continued to lead the portfolio with strength and face mask materials and specialty hospital products.
Filtration sales increased led by the air Subsegment, and industrial sales increased with getting to the packaging and green energy products.
Infrastructure and construction and transportation both finished lower for the year, but we were pleased to see each of them rebound in the fourth quarter.
I'd also like.
Like to highlight that excluding transportation, which was our most COVID-19 impacted and market organic sales would have actually increased for the year.
Specifically for the fourth quarter organic growth was 21% and we were especially pleased with the resurgence of our transportation.
Sales were following some choppiness earlier this year.
We had signaled during our third quarter call that we were seeing signs of global improvement and our optimism was justified as those sales grew materially versus last year's fourth quarter.
We continue to expect.
<unk> very strong sales and this market for several quarters as we get back to normalized levels.
Double digit filtration growth was another key driver for the strong organic sales growth with gains across our water process and as sub segments.
Resilience across the portfolio coupled with.
And film cost performance and the Tegra acquisition contributed to our ability to grow Ams segment profit by 6% for the full year.
Looking back we were very encouraged that our various end markets performed generally as we had expected and we exit 2020 with good momentum and increased confidence that.
Good balanced portfolio and robust supply chain of well positioned over the long term to withstand periodic economic challenges.
Switching to engineered papers the segment wrapped up of banner 2020, with solid execution and the fourth quarter.
During the quarter.
We also successfully closed the spots wood facility transitioning those volumes to other sites, while maintaining high levels of customer service across the business.
For the year volumes decreased 3% of rate consistent with our expectations given global industry attrition.
Order and the continued emphasis on lower margin products.
That said, we still delivered another year of positive price mix shifts as heat not burn grew and our portfolio continues to shift toward a higher value product lines.
More importantly, however segment profits had a notable jump.
Is it years.
And we note that we had been running and the low to mid $120 million range for EP operating profit from 2017 through 2019, but increased 8% for about $10 million and 2020.
Much of this was the previously discussed inventory builds that.
Benefited our third quarter, but we also saw great execution throughout the year and benefited from favorable input costs.
2020 will be difficult to repeat but we are pleased to have such strong segment performance and associated cash flow during an uncertain year.
All told.
And despite some temporary site shutdowns early in the year, we were flexible and agile in responding to our customers' needs, earning a reputation as a trusted strategic supplier to our paper customers.
With that I'll turn the call over to Andy.
Thank you Jeff.
Consistent.
And with Jeff's comments I'll focus mostly on the full year results and trends and also highlight key fourth quarter takeaways.
Beginning with our segments Ams sales increased 14% for the year and were down only 2% excluding the <unk> acquisition.
Tegra.
Distributed $77 million of sales for the year and recall, we closed the transaction late in the first quarter.
The 2% organic sales decline was largely driven by the decrease and aftermarket transportation films.
And the remainder of the portfolio actually increased 1%.
As Jeff referenced Ams organic sales for the fourth quarter was a very strong and increased 21% with transportation sales increasing over 70% from the prior year quarter driving the growth.
However, even excluding that strong increase and transportation.
Films are other markets organic sales growth would have been a combined 7%.
Ams adjusted operating profit grew 6% for the year.
And we benefited from the incremental profits from Tegra as well as lower input costs, which more than offset the modest organic.
Organic sales decline.
Adjusted operating profit margin contracted 120 basis points.
Reflecting the organic sales decrease.
And for the fourth quarter adjusted operating profit increased an impressive 65% with margin expanding 230 basis points.
The strong growth again captures the Tegra acquisition, but also the very strong organic sales growth in the quarter and was amplified by the margin benefit of the rapid growth and they are high value transportation film products.
For engineered papers.
Per sales were down 3% or 2% ex currency.
Lower volumes were partially offset by favorable price mix effects.
The adjusted operating profit increased an impressive 8% for the year with margins expanding by 250 basis points.
The margin.
The expansion reflects the positive mix shift towards high value products operational improvements and lower input costs.
EP segment profit for the year was very strong and was well above our recent multi year trend as Jeff noted.
While fourth quarter sales and operating profits were lower.
Lower versus the fourth quarter of 2019. This was primarily due to very strong high value sales a year ago, which created a difficult price mix comparison of negative 6%.
However, as mentioned price mix for the full year was still a net positive.
Regarding unallocated expenses, we saw an increase of approximately $3 million for the full year and $4 million for the fourth quarter.
We incurred several million dollars of consulting and acquisition diligence expenses during the fourth quarter, which accounted for the increase.
These projects aside and.
<unk> expenses would have been generally in line with 2019 levels.
On a consolidated basis sales for the year increase of 5% and sales and the fourth quarter increased 17%.
Adjusted operating profit and EBITDA.
Increased 8% for the year.
And increased 14% and 15% respectively for the fourth quarter.
And we're very pleased to deliver the strong results with a challenging operating and economic environment.
Full year 2020 GAAP.
The EPS was $2 66 versus $2 76.
The most material comparison items relate to restructuring and other expenses, mostly and the EP segment in relation to the sponsored shutdown and the 2019, Brazil tax assessments.
GAAP, please refer to our non-GAAP tables for details on these items.
On an adjusted basis EPS for 2020 was $3 68.
Up 4% versus 2019, marking our third consecutive year of adjusted EPS growth.
Believe we are establishing a solid track record for consistent growth.
Which is due to both of our strategic efforts and internal investments to diversify the company's portfolio and shifted towards growth markets.
We have achieved this growth and both positive and challenging economic environments.
We book.
Fourth quarter 2020, GAAP EPS decreased to <unk> 48 from <unk> 64.
The decrease was largely due to restructuring expenses related to the shutdown of the spots with the site.
The adjusted EPS decreased slightly to 77 from <unk> 80.
<unk> due to a higher tax rate and recall that adjusted operating profit and EBITDA both increased during the quarter.
The tax rate embedded in the full year 2020, adjusted EPS calculation was 21%.
Up from 19, 3% and 2019 due.
Changes in geographic earnings mix and changes and certain tax laws.
For the fourth quarter, the tax rate embedded and adjusted EPS was 21, 7% up from 15, 8% and last year's fourth quarter.
The low rate and Q4 2019.
It was booked to reflect our full year rate.
While we would normally provide annual adjusted EPS guidance at this time, we are restricted from making certain forward looking comments as we maintain compliance with U K takeover panel regulations surrounding our pending.
The offer for SCAP of group, a U K based public company.
We can however provide some directional comments in the meantime to assist the investment community and understanding our app.
The first excluding any financial impact from the pending acquisition.
And but expect our base business to continue to deliver another year of adjusted EPS growth.
Second.
We would expect our EP business to have its operating profit revert toward the multi year trend after a particularly strong 2020.
We believe this.
We would act to normalized levels will be more than offset by anticipated profit growth and Ams from expected strong organic sales growth.
Third we would expect a decrease and unallocated expenses due to the non repeating nature of the consulting and acquisition diligence expenses from the fourth.
And <unk> of 2020.
Lastly, we expect another strong year for free cash flow as well as some capital projects were deferred from 2020 into 2021.
Non are sort of substantial as true to dramatically impact our cash flow.
We acknowledge this may be.
Quarter for Asian, given our history of providing annual guidance at this point, but we fully intend to provide full year adjusted EPS guidance, including the impact of the pending SCAP of acquisition. After the transaction closes and we're committed to make forward looking comments about our business.
The upfront.
Moving to cash flow and liquidity to summarize we generated $162 million of operating cash flow and $128 million of free cash flow and 2020, both up from 2019 levels.
Capex of $33 million was below our initial expectations.
For the year as we continue to prudently deploy capital.
We currently stand at two three times net debt to adjusted EBITDA per the terms of our credit agreement.
For perspective on our track record for Delevering post acquisitions.
Our net leverage.
The patient was at three two times after we closed the <unk> acquisition and 2017 and reached two one times at year end 2019, just prior to acquiring tegra.
Post the tech for acquisition, we were at two seven times at the end.
Third quarter of 2020 and have de Levered 0.4 times since that point, showing we have consistently de levered following acquisitions.
Lastly, as of year, and we had approximately $500 million of available liquidity between cash on hand, and our revolving.
The first credit facility.
Of course, our capital structure will look different upon a successful close of the pit of.
Of the pending SCAP of transaction.
As we've disclosed already we're currently and the process of of term loan B financing, which is expected to close next week to finance a portion.
Volume for the acquisition.
Upon close we expect net leverage to be between for <unk> and four five times now back to Jeff.
Thanks, Andy.
So to conclude I'd like to reiterate some key highlights about 2020 and share some positive perspective a bit with.
Limitations on our outlook and strategy.
We're definitely proud of the results we achieved in 2020 and the people who work together to make that happen.
The year was not without challenges ranging from finding solutions to keeping our employees safe, while still providing great service.
Two of our customers.
To flexing our operations in order to meet high demand for certain product lines.
Our resilience was truly tested and 2020 and I firmly believe we have delivered.
And hopefully our results for this year demonstrate we are capable of solid financial performance even in a difficult.
And volatile operating environment.
Our paper business exceeded our expectations delivering meaningful profit growth and once again generated robust free cash flow.
Ams had its first 500 million per year and despite the mid year headwinds rebounded sharply in the fourth.
Quarter and is poised for strong organic growth and 2021.
And when we consider our overall portfolio, we believe our diverse end markets provide a good balance of stability plus growth opportunities that should serve us well as we continue to expand.
Speaking of expansion.
I'd also like to reiterate some themes from our investor call, when we announced the pending acquisition of Scapa.
First Scott for advances our successful value added solution strategy as it expands our core competencies adds new capabilities and enables us to bring our customers a more comprehensive suite.
Suite of solutions.
Broadening offerings and technologies to help solve our customers' challenges is a long term strategic direction and this acquisition would mark another significant step forward and our value added capabilities to support our customers.
Second and Scapa will give us immediate.
Income mass and the growing medical materials space with approximately $250 million and annualized sales between us and <unk>.
Focus on innovative skin friendly technologies and their end to end offerings range from adhesive formulations and product design through converting and packaging finished products.
And extends to compliance and regulatory approvals.
Third we would also add and industrial division with highly complementary capabilities and overlaps with several end markets, we already serve such as transportation and construction.
And most importantly, both groups.
The critical with significant people talent.
Last but certainly not least the addition of Scott is expected to push SWM sales towards one $5 billion and Ams towards $1 billion of annualized sales. So nearly 65% of the combined company sales were generated.
Com generated and growing segments, such as medical filtration and transportation infrastructure and construction and industrial.
Bottom line, we expect this transaction will enhance swm's long term growth profile.
While we cannot yet comment on our 2020 outlook other than direction.
Directional items, Andy referenced we are excited about the many strategic efforts to grow our base business and we look forward to closing the transaction and sharing details on our financial outlook at that point.
That concludes our remarks Geneka. Please open the line for questions.
At this time, if you would like to ask a question press Star one.
And on your telephone keypad.
And then that is star one to ask a question.
The first question comes from the line of Chris.
Mcginnis of Sidoti and company.
And good morning, Thanks for taking my questions and nice quarter.
And maybe if you could just start within Ams and just that strength you've seen the transportation you talked to me.
And the near term.
Can you maybe.
And how much of that is pent up demand and there was waiting and I know.
A big part of it but.
Maybe just the organic growth of that.
And the sense of a more normalized trend.
You can get to that and the back half of the year, just trying to get a little bit of feel around that that growth I mean, it was a very very strong and the quarter of.
Yes, sure Chris I'll be happy to try to give you some colors.
And that's obviously you said, it's hard to give you the exact the interpretation certainly with the incredible strength, we had and the fourth quarter part of that was backup demand. So many of our suppliers as we had indicated lowered their supply chains earlier in the year as some of the consumption was reduced.
And then I think everybody.
It was a bit surprised about how rapidly the marketplace returned to normal if you recall quite of bit of that marketplace is growing fast in China and that market recovered earlier and so we saw a rapid increase and people trying to fill supply chains now with that said.
And we have always said this is one of our fastest growing markets overall and I don't think those trend lines of changed at all so I think youre seeing a little bit of a combination of both both of it a little bit of restocking supply chains to normalized levels and then we continue to see strong long term growth opportunities for this marketplace.
Very helpful. Thanks for the.
And I guess, just and thinking about cost pressures when you look out of 21.
Anything to highlight on the cost side for raw materials.
And.
Yeah, I think of course, the first thing and that's on everybody's mind is the rapid increase of the polypropylene pricing, we're seeing the same head.
Great and that everybody else I'm sure is reporting throughout the industries.
But we have a number of activities in place to help mitigate some of those effects. So thats everything from contractual price increases to other types of price increases. We're also doing things on the operation side around scrap.
Headwinds action efficiency et cetera. So we have of numerous programs to offset that but it's certainly not the way you want them to start the beginning of the year, because I think globally and most people would say this.
The amount of rise of polypropylene has been unexpected I think the other point, though to continue to emphasize is that the majority.
D of our resin costs are for our of thermoplastic polyurethane films, the transportation industry and we're not seeing those types of cost pressures on those resins.
Okay. Thanks for that and I guess, just in terms of impact and it sounds.
The manageable at least.
Or is that more forward and loaded and the year are more back half and I guess can you think about that for demand trends and how you.
And you talk about sort of growth for the year and I can't say much.
But.
And if you think about the year.
Just given 2020 was so different.
Whats the expectation for growth.
And you can go out and is there any cadence or anything as you think about the year playing out that should be highlighted.
Sure. So I'll take the first stab at that the the.
First thing I would highlight and we kind of always reemphasize is that this is the portfolio and it's a portfolio of effects. So.
Jeff.
Both of US you've seen what happened and the fourth quarter specifically.
And for the year.
And even like a market like medical that was up all year.
I would say the pretty significantly.
And there was up and the in the fourth quarter.
And then filtration and sort of puts and takes we had really high growth.
And then and air water would've been a little bit weaker last year and now we look at and the fourth quarter and water sort of award back and and now were really bullish and that outlook. So.
I am giving you a long weighted answer of really saying, it's really a portfolio of fact and so when we look at the growth lines for two.
'twenty 'twenty, one I would say transportation, we're exceptionally bullish on I mentioned that it was up 70%.
And the fourth quarter now thats not sustainable, but we still expect really strong growth.
And that segment.
And we will have a tough comparison, we spoke about the to grow but.
Water filtration should be really strong next year, so and we kind of we talk about our sort of key end markets that are really the growth drivers for us. We're really optimistic about transportation films were really optimistic still about filtration and we're optimistic about medical and other.
So you would love to hear something.
And our specific sort of.
The percentage range of growth, but.
Because of some limitations because of the U K takeover panel.
We will be able to get into more color.
Hopefully that.
Q1 call or certainly when we.
And when we close Scott.
[noise] about provide more color and.
Outlook for the year.
And I appreciate the color and understand the.
Of the regulation for the because you are up against.
And just turning to EP little change there can you just walk through maybe the thought process for me.
Is price and mix.
And we will.
Different set of portfolio for you and.
Versus the.
Technical but for our Ams.
<unk>.
And just how do you think that playing out for the year I know you talked for the margin side the <unk>.
The side, but just demand trends and the outlook.
The 2020.
Yes.
We continue it and its been a conscious effort probably over the last of to even two years, where we.
We've been much more focused on.
And on profit growth versus the top line number and that's why you've seen our margin continue to creep up here over the past couple of years.
I don't think thats really going to change.
<unk>.
I think the one thing to note from 2020 is that you did see the attrition rate.
Moderate fairly significantly from where we were tracking from 2017 through 19.
So that is that has tempered.
Remains to be seen and how that rate.
It really changes and 'twenty one.
But at the end of the day, we still continue to focus on a lot of the high value products, whether it's our <unk> papers, the wrapper and binder products recon heat not burn all of those are really the high value products and and we continue to expect to have.
Have a good solid stable business there.
Great.
And I appreciate the color.
And the good luck and Q1.
Great. Thanks, Chris.
And at this time there are no further questions in queue.
Yeah.
Okay.
Yeah.
And I'll now turn the call back over to Jeff for closing remarks, Okay. Thank you and Geneka well again, everyone. Thank you for tuning in and.
And listening to share our story I want it.
And again.
<unk>.
Positive comments about just the contributions of our people.
We say many times that people make the difference.
I think this year you saw absolute.
And proof of that without our global teams it is impossible for us.
Clothes achieved these results I'm really proud of the results, but im even more proud of our global team. So I want to thank them again, and thank everyone and look forward to sharing more information and Q1. Thank you.
This concludes today's conference call you may now disconnect.
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